Tax Loss Harvesting Sanity Check

[BiggerFishToFI]

I did this a couple years back, but have not been taking advantage of it even though I probably could have saved a few K the last couple years. Seems like there is an opportunity with the latest decline.

Since I am pretty much 100% index funds, I need to harvest those not individual stocks

1. Turn off all dividend reinvestment, in all accounts for the specific investment I plan to harvest (including tax advantaged accounts)
2. Ensure no dividend reinvestment or purchases of the specific investment have been made in the last 30 days
3. Sell all shares, which are set as specific identification, that show a short term or long term loss.
4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX
5. Wait 30 days before turning dividend reinvestment back on, or buying any shares that have been harvested.
6. Up to $3000 of the losses can be deducted against ordinary income taxes, and any amount of losses can be carried forward for deduction in later years.

Does that all sound correct?

Any good resources for strategies that make this easy to manage with index funds / allow for opportunities to harvest moving forward?

Thanks!

[cool7hand]

4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX

This won't work on platforms like Schwab when making the purchase in the same account.

[BiggerFishToFI]

4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX

This won't work on platforms like Schwab when making the purchase in the same account.

Everything is in Vanguard, but I guess you are saying I would need to wait until the following day for the mutual fund to sell?

[seattlecyclone]

In Vanguard you should be able to use the "exchange" button to transfer money from one mutual fund to another. This is treated exactly the same as a sell followed by a buy.

[nalor511]

4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX

This won't work on platforms like Schwab when making the purchase in the same account.

It works fine in Schwab, instead of the exchange button, sell in dollars $100000 VTIAX, buy in dollars $100000 VTSAX, done. I've done it many times, both orders will execute same day

[s0198362]

I too have a question on TLH.  If you want to TLH do you need to make sure your 401k is not auto buying into similar funds?

Thanks

[reeshau]

4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX

Just be aware, the definition of substantially similar has not been ruled on by the IRS or a tax court for mutual funds and ETFs.

For example, VTSAX and VFIAX have the same top 10 holdings, even though they state different objectives:

https://www.investopedia.com/articles/investing/111215/vanguard-total-stock-index-vs-vanguard-500-index-fund.asp

This Morningstar article gives some guidance, but again until there is some legal precedent, then you are in a grey area.

https://www.morningstar.com/articles/1045354/wash-sale-challenge-what-is-substantially-identical

From the article:

"In order to avoid being substantially related, the fund sold at a loss must have equal to or less than 70% overlap with the tax-loss harvesting alternative. Although the 70% line applies to straddles, it could be useful when comparing mutual funds."

[nalor511]

4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX

Just be aware, the definition of substantially similar has not been ruled on by the IRS or a tax court for mutual funds and ETFs.

For example, VTSAX and VFIAX have the same top 10 holdings, even though they state different objectives:

https://www.investopedia.com/articles/investing/111215/vanguard-total-stock-index-vs-vanguard-500-index-fund.asp

This Morningstar article gives some guidance, but again until there is some legal precedent, then you are in a grey area.

https://www.morningstar.com/articles/1045354/wash-sale-challenge-what-is-substantially-identical

From the article:

"In order to avoid being substantially related, the fund sold at a loss must have equal to or less than 70% overlap with the tax-loss harvesting alternative. Although the 70% line applies to straddles, it could be useful when comparing mutual funds."

These phrases from your post and from the article "substantially similar" , "substantially related" --- have no bearing in reality. The only phrasing used by the IRS is "substantially identical", not similar, not related, identical. There is no 70% benchmark, there is no ruling for small traders, those are just guidelines that professional traders are following. Something like VTI and ITOT are not substantially identical, the ER is different, they hold different underlying stocks, and the management company is different. Obviously TLH is done at your own risk, but the IRS is not coming after an individual trader due to some imagined 70% "similar" or "related" threshold --- they don't want you buying something "identical", like trying to TLH SPY into SPY options, or into SPY in another account.

[MustacheAndaHalf]

4. Immediately buy a different, but similar fund, such as a S&P500 fund instead of VTSAX

This won't work on platforms like Schwab when making the purchase in the same account.

It works fine in Schwab, instead of the exchange button, sell in dollars $100000 VTIAX, buy in dollars $100000 VTSAX, done. I've done it many times, both orders will execute same day

It's a really bad idea to buy and sell Vanguard mutual funds at Schwab.
"All other mutual funds (7) : Up to $74.95 per purchase"

Rather than use VTIAX and VTSAX, use ETF equivalents VXUS and VTI.  Those are $0/trade at all brokers.  Another benfit is you can sell shares of VXUS and immediately get a credit, which you then immediately use in buying VTI shares.  I think it's both smoother and lower cost to do this with ETFs.

---
Personally I let my broker worry about "substantially identical", which I suspect most brokers shorten to "identical".  You could sell VTI (total market) and buy SCHB (broad market), which are 1.00 correlated... but they have different brand names (Vanguard vs Schwab) and different contents (4100 stocks vs 2500).  You could also argue that since the IRS phrase "substantially identical" has never been defined, "identical" is a reasonable interpretation for ETFs and stocks.

I believe there are other asset classes like precious metals where it's probably a more useful distinction.

[BiggerFishToFI]

Thanks everyone.

For any future readers reference, I ended up using the following as tax loss harvest "partners". I hold S&P 500 funds in retirement funds so decided to avoid those. Took me a bit of research to decide so thought it may be helpful:

Mutual Funds:
VTSAX --> VLCAX
VTIAX --> VFWAX
VSIAX --> VTMSX

ETFs:
AVUV -->  IJS