Tax Loss Harvesting

[bobbyj]

Do the benefits of tax loss harvesting decrease the longer money has been invested?  I'm trying to understand Betterment's offering, and it seems like the longer money has been invested the fewer the opportunities there will be for tax loss harvesting as more and more of the lots will have capital gains.

[seattlecyclone]

Yes, you're most likely to have the opportunity to harvest losses on shares you bought within the past few years. After a certain point your shares will have appreciated enough that you'll be unlikely to ever have a loss on those shares.

[milesdividendmd]

Yes, you're most likely to have the opportunity to harvest losses on shares you bought within the past few years. After a certain point your shares will have appreciated enough that you'll be unlikely to ever have a loss on those shares.

I think "it depends" is closer to the truth than "yes."

The clock starts again each time you invest so if you are continually investing you should be able to continually tax loss harvest.

If you are talking a single lump sum then as the portfolio matures the opportunities to tlh will diminish.

[johnny847]

I'm probably being overly pendatic, but I think this is a poorly phrased question.

It is true that the longer any particular tax lot remains invested, the fewer opportunities for TLH arise.

But to say that the benefits of TLH decrease the longer money has been invested just isn't true. If I TLH today, the benefits from that TLH don't decrease over time.

[seattlecyclone]

How about this for a phrasing: the longer any particular tax lot has been invested, the less likely it is to be eligible for tax loss harvesting, either now or in the future. As you continue saving and building your portfolio over time, the percentage of your assets that is invested in such older tax lots will increase. Therefore the amount of benefit to be had from tax loss harvesting as a percentage of your portfolio will decrease as time passes.

When considering a service such as Wealthfront or Betterment, it's important to take the long term into account. Their tax-loss harvesting may pay for a good chunk of their management fee in early years, but this is less likely to be the case as your account grows and ages. The future is of special concern if you get into Wealthfront's "direct indexing" service where they invest your account in hundreds of individual stocks (market-cap weighted like an index fund) to get more opportunities to harvest losses. Sure you can transfer your account to another brokerage at any time, but in practice nobody is going to do this because they don't want to deal with tracking hundreds of individual stocks. So once you join up, you're pretty much stuck paying their fees until you decide to liquidate your account and pay the tax man a potentially large amount of money.

[milesdividendmd]

How about this for a phrasing: the longer any particular tax lot has been invested, the less likely it is to be eligible for tax loss harvesting, either now or in the future. As you continue saving and building your portfolio over time, the percentage of your assets that is invested in such older tax lots will increase. Therefore the amount of benefit to be had from tax loss harvesting as a percentage of your portfolio will decrease as time passes.

When considering a service such as Wealthfront or Betterment, it's important to take the long term into account. Their tax-loss harvesting may pay for a good chunk of their management fee in early years, but this is less likely to be the case as your account grows and ages. The future is of special concern if you get into Wealthfront's "direct indexing" service where they invest your account in hundreds of individual stocks (market-cap weighted like an index fund) to get more opportunities to harvest losses. Sure you can transfer your account to another brokerage at any time, but in practice nobody is going to do this because they don't want to deal with tracking hundreds of individual stocks. So once you join up, you're pretty much stuck paying their fees until you decide to liquidate your account and pay the tax man a potentially large amount of money.

I agree with every point you made here.

The only quibbles are small. In the early years you are likely to have to have TLH cover your expenses completely with extra savings banked and compounding.

As your account ages it is likely that TLH will not cover the entire AUM fee, but at that point some of your assets will be the compounded post tax gains that you have benefitted from in the first place.

At the point at which your costs outstrip your TLH savings it is quite easy to simply transfer your ETFS in kind to another brokerage.

Whether or not you will want to do this is a question of what betterment's service is worth to you at that point.

[AnAmericanAbroad]

Since only the first $3k of losses can be claimed against ordinary income in a year, isn't there a clear cap on the usefulness of TLH during the accumulation period? During the drawdown stage you can use your loss carryforward to offset gains realized in retirement, but if you're in the 10% or 15% marginal income tax brackets there's no tax on long term capital gains, so unless you have short term gains you have to realize, I see little benefit to TLH in retirement. Am I missing something there?

Overall then, wouldn't someone be less concerned with TLH on a decent sized portfolio? If you have a decent 'stache as you build towards FIRE it only takes a small loss to hit $3k a year, even if much of the basis is older and likely still in positive territory, as discussed above in the thread. My taxable account isn't very large at this stage but the recent Greece wobble was almost enough for me to max out my $3k of income offset for the year.

Based on the above, wouldn't someone pursuing FIRE cap out the TLH benefits of the robo advisers fairly early in their path to FIRE, and would lose that offset against the fees they charge, thereby making the robo advisers a worse deal?

[milesdividendmd]

You can carry forward losses to offset capital gains in future years, so $3000 is not a cap at all.

So if you take 20K in tax losses, you can use those losses to offset gains in your FIRE withdrawal phase for many years to come.

[AnAmericanAbroad]

You can carry forward losses to offset capital gains in future years, so $3000 is not a cap at all.

So if you take 20K in tax losses, you can use those losses to offset gains in your FIRE withdrawal phase for many years to come.

Right, but that $20k would be enough to offset almost 7 years of income, assuming the $3k cap remains unchanged. If you're only working another 7 years, that $20k of TLH would mean you're set for your accumulation phase, and based on my logic in my last post that means you're kinda done with TLH for your life if you're in the 10% or 15% marginal tax brackets in retirement. So if you're using Wealthfront and you have a large tax loss carryforward that takes away a significant value proposition from Wealthfront's services.

[milesdividendmd]

Yes and no. The unrealized tax losses can be used to offset capital gains in retirement or even to increase the amount of money you can convert in a Roth ladder without crossing the 15 % tax bracket.

Still useful even for a FIRE in the withdrawal phase in many circumstances.

[AnAmericanAbroad]

That's a fair point, miles.