Author Topic: When is Tax Loss Harvesting not worth it?  (Read 2959 times)

xenon5

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When is Tax Loss Harvesting not worth it?
« on: December 28, 2015, 10:36:58 PM »
This is my first year with a taxable account.  I have $6k in VGTSX and $11k in VTSAX.  I have capital gains of $29 in VTSAX and losses of $140 in VGTSX.  These are pretty small amounts, but with tax loss harvesting I would capture $35 in tax savings.  My balance of VGTSX is small enough that I could exchange it for VTSAX and just repurchase VGTSX later in the year after contributing to the 401k/IRA.

 But is that worth it?  At what point is it not worth pursuing TLH when the option is available?  What if the asset price comes up during the day when I'm not looking and I end up with a capital gain?

My problem with TLH is that I'm having trouble setting up a precise framework for how and when I want to TLH - for example, whether to exchange for another fund, or allow the proceeds to sit in my settlement fund for a month, or do nothing at all.  With a much larger amount if money, I imagine TLH could throw your AA out of wack pretty easily.  Does anyone have any advice on how I can formulate my TLH strategy for future years?

NorCal

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Re: When is Tax Loss Harvesting not worth it?
« Reply #1 on: December 28, 2015, 10:51:21 PM »
While TLH is a good strategy overall, I would avoid it if you're making large decisions around it.  If there's a question on whether the dollar amount is worth it, it's probably not.  I personally wouldn't bother for $35 in tax savings.  Time out of the market is potentially worth a lot more than that (depending on what your total investment is).

I'd personally take notice if the tax savings was in the multiple hundreds of dollars, or if it was a year that I was planning on having an abnormally high tax bill.

My strategy would be to look for a comparable fund that you could buy into.  I invest through Schwab, so I might sell my "Broad Market Index" for a S&P 500 index to take advantage of the losses.  The funds are similar enough to not make much of a difference.

soupcxan

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Re: When is Tax Loss Harvesting not worth it?
« Reply #2 on: December 29, 2015, 09:05:02 AM »
with tax loss harvesting I would capture $35 in tax savings.

$35 as in $35.00? No it is not worth the effort for $35.00. There needs to be a comma in the number for it to be worth it.

xenon5

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Re: When is Tax Loss Harvesting not worth it?
« Reply #3 on: December 30, 2015, 10:07:11 AM »
with tax loss harvesting I would capture $35 in tax savings.

$35 as in $35.00? No it is not worth the effort for $35.00. There needs to be a comma in the number for it to be worth it.
  Right, that's what I would assume.  My point is that I hear all this talk about how great TLH is, but no discussion of where the cutoff is in terms of being worth it, between whether you should be looking out for a particular $ amount or a particular % drop in asset price.

MrFrugalChicago

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Re: When is Tax Loss Harvesting not worth it?
« Reply #4 on: December 30, 2015, 10:10:12 AM »
If you are doing it by hand, assume a few hours... if your time is worth $50 an hour - you have your answer.

If you have something automatically doing it (say the company MMM pitches with auto tax loss harvesting), all you need to do is compare the tax loss harvesting win to the cost of using the finance service...

xenon5

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Re: When is Tax Loss Harvesting not worth it?
« Reply #5 on: December 30, 2015, 10:20:41 AM »
If you are doing it by hand, assume a few hours... if your time is worth $50 an hour - you have your answer.

If you have something automatically doing it (say the company MMM pitches with auto tax loss harvesting), all you need to do is compare the tax loss harvesting win to the cost of using the finance service...
  Other than selling the asset and reporting the loss on your tax return, what else is required?  I generally use tax filing software.  I'd assume it wouldn't take more than 30 minutes total to exchange the fund, then input the numbers from the tax document Vanguard provides me.

seattlecyclone

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Re: When is Tax Loss Harvesting not worth it?
« Reply #6 on: December 30, 2015, 10:46:32 AM »
If you are doing it by hand, assume a few hours... if your time is worth $50 an hour - you have your answer.

If you have something automatically doing it (say the company MMM pitches with auto tax loss harvesting), all you need to do is compare the tax loss harvesting win to the cost of using the finance service...
  Other than selling the asset and reporting the loss on your tax return, what else is required?  I generally use tax filing software.  I'd assume it wouldn't take more than 30 minutes total to exchange the fund, then input the numbers from the tax document Vanguard provides me.

You're pretty much right. You also have to consider the ramifications of your fund going up in value during the month you don't own it to avoid wash sales. If you convert to cash for a month, you could be out much more than $35 in market movements. If you convert to a similar fund that you don't like quite as much, you could be facing the choice between selling that fund for a short-term gain to switch back to your preferred fund (potentially negating your $35 tax savings), or staying in that new fund indefinitely even though you don't like it as much as the other one.

Tabaxus

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Re: When is Tax Loss Harvesting not worth it?
« Reply #7 on: December 31, 2015, 08:19:24 AM »
Keep in mind that it can be very difficult to use Betterment or any other auto tax loss harvesting type of setup if all of your funds aren't at that brokerage (or you aren't making deposits elsewhere and you have turned dividend reinvesting off).


I really wanted to try Betterment, but my 401(k) (and IRAs) are at Vanguard.  If I have deposits going into my 401(k), those buys could trigger wash sales with Betterment's auto-investing--and that can be catastrophic if you're shifting basis to a 401(k) account, since you never really get credit for that basis.

This year I'm thinking about maxing my 401(k) early and then moving everything to Betterment 30 days later and turning on auto TLH.  I can probably max the 401(k) in ~3 months.  But still, I'm not sure I want to pay the extra .15% or whatever it is at Betterment when I'm having to be so careful about when I have TLH on.

Scandium

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Re: When is Tax Loss Harvesting not worth it?
« Reply #8 on: January 05, 2016, 02:44:23 PM »
My 401k, roth and taxable all being in  broad index funds totally messed up any opportunity to do TLH. Having to stop contributions and dividends in all of those for 30 days would be giant hassle.
Oh, and our 529 has a vanguard fund too,  wouldn't that count as well..?

And you're really just deferring taxes, as you're driving down your cost basis. So it's not 100% gains.

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