jacoavluModeratorStatus: Physician, Small Business OwnerPosts: 2291Joined: 03/01/2018
the IRS regs say “substantially identical” and not “identical”
you are free to interpret “substantially” however you want, me personally I wouldn’t want to defend your position
plus to me it doesn’t make sense to use multiple SP 500 indexes when there are other excellent choices with some degree of dissimilarity
The Finance Buff's solo 401k contribution spreadsheet: https://goo.gl/6cZKVAENT DocParticipantStatus: PhysicianPosts: 3459Joined: 01/14/2017
Way over thinking this.
I do monthly, at the least.
Sure little dinks/dunks nice, but TLH matters most when big market declines happen.
What even are you using for daily partners…..?Click to expand…
Thank you for your response.
So far I’ve been going between different firms’ versions of the total stock market ETF and s&p500 etf, so for example, schwab’s s&p500, then vanguard s&p500, then ishares s&p500, then schwab total stock market, etc. Next ill be TLH’ing into large cap ETF’s (ie, VV), until I can start over again within a few wks.Click to expand…
Yikes.FCPParticipantStatus: PhysicianPosts: 89Joined: 01/26/2016
I appreciate everyone’s feedback. I will go ahead and have some additional meetings with my accountant and tax attorney to see how I can do things differently to minimize risk of having my trades be considered wash sales. If I ended up creating any wash sales in these past two months; I don’t mind; it hasn’t been even two years since I finished fellowship, and the amounts of money I’ve been doing this with has been small, so it’s not a big deal (I have less than 500k in my brokerage accounts). I am posting this for the sake of learning how to do this correctly so I don’t have any regrets 10/20/30 years down the line when my brokerage accounts are in the millions/tens of millions. Thank you.June 4, 2019 at 7:46 am MST #219187Jack_SparrowParticipantStatus: PhysicianPosts: 65Joined: 01/09/2019
Monthly, weekly and daily tax loss harvesting seems extreme to me. I have a taxed brokerage accountant I buy probably 60% individual stocks, 40% high risk index funds and use that for tax loss harvesting. I probably make 2-3 trades a month and I feel like I’m watching the market about an half hour to an hour a day.
Its seems a little crazy to consider tax loss harvesting on a daily even a monthly basis, especially with Index funds. With individual stocks it seems to make alot more sense.
If your loss harvesting Index funds daily, seems like you run a much higher risk of missing out on a lot of actual gains for the sake of locking in a tax break. Seems like emotional buying and selling would occur as you justify “no problem selling at a lost, because I’ll get a 3k tax break” I mean yesterday a fund is down 1%, today its up 1%. I can see TLH more so when the funds general direction is down 10% and you think its generally bottomed out or close to bottoming out, but no way you can call that on a daily basis conistently. I mean tax loss harvesting is maybe 15 cents on every dollar you would have gained if the stock went back up. Seems like you need to be right in your TLH timing 6-7 times straight to offset a $1 in capital gains.
I mean if I buy 10 tech stocks, i’ll keep the winners and sell the losers after a big swing, but hard to see how you can make a lot tax loss harvesting the S&P 500.spiritriderParticipantStatus: Small Business OwnerPosts: 1869Joined: 02/01/2016
The IRS would probably consider the various brokerage S&P 500 index funds as substantially identical and thus you could be creating wash sales. At a minimum, you should use tax loss harvest partners that don’t track the same index.Click to expand…
The wash sale rule does not say substantial similar, it says substantially identical.
The IRS has not ruled or issued guidance that mutual index funds/ETFs tracking the same index from different companies constitute substantially identical securities. In fact in Publication 564 it says;
“Substantially identical. In determining whether the shares are substantially identical, you must consider all the facts and circumstances. Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.”
Publication 564 was last issued in 2009, more than three (3) decades after retail index fund competition. They clearly had time to state otherwise. Caveat: While IRS Publications are a good indication of the IRS’ views, they do not constitute “substantial authority”.
Many in the financial community have espoused the theory that what matters with index funds is substantially identical performance. While the courts and the IRS have never applied this to equities, there is precedence to the performance consideration when it comes to bonds. Court precedent and the current IRS position hold that bonds with different CUSIPs, but the same issuer can be considered substantial identical if they have substantially identical maturity, interest rate, yield, and any early redemption restrictions provisions.
Here is my view on this issue:
- Even though S&P index funds/ETFs have different issuers, they all track the same index with the same number of companies and minimal tracking error. I would not hang my hat on different issuers for the S&P 500 avoiding a wash sale if audited and the IRS wanted to push it..
- With Total Stock Market and Total Bond Market index funds/ETFs different issuers often use different indexes often with sampling techniques to not even hold the full index. They often have a non-insignificant difference in the number of holdings. You are reasonably safe with different issuers for wash sale pairs.
- An even safer strategy is to switch back and forth between Total Stock Market and a weighted S&P 500/(Extended or Completion) Market. You are very safe with combinations as wash sale pairs.
Given that the OP is talking about Total Stock Market, I would do 3. I have never felt the need to TLH fixed income, but if I did I would use 2. rather than trying to weight sub-market bond index funds.
OP: Keep in mind that to avoid a wash sale it is 30 days before and 30 days after. So you can only do this once every 61 days.DAKParticipantStatus: Other ProfessionalPosts: 22Joined: 11/30/2016
Sorry I’m late to this party. I think there are two other “somethings” you are missing. 1) a Tax Loss Harvest event reduces your basis. 2) When you sell 100k of stock (e.g., “take out 100k from the portfolio”) you owe taxes ONLY on the gains above the basis, and not the full amount.
TLH can reduce ordinary income now, which is great…up to $3k per year (not much).
But use your $100k example. Say that you bought stock for $200k. It goes down to $100k. You tax-loss-harvest and reset your basis to $100k. It goes back up to $200k. If you want to sell half of it at price, you will net $100k off of $50k basis and end up with gains of $50k. You will use up $50k of your capital loss carry-forward.
Therefore, you will have $100k cash, $100k worth of stock with a basis of $50k, $50k of losses carried forward. If you were to liquidate everything there would be no capital gains tax due (assuming that you had not yet used the TLH to offset ordinary income)
In contrast, if you had not done the TLH, you would have $100k cash, and $100k stock with a basis of $100k and no losses carried forward. From a tax perspective you’d be in the same place, and you would have had more free time to do other stuff since you were not doing TLH.
To me, TLH is useful in a few situations that come immediately to mind (I’m sure there are more)
- Small amounts of losses carried forward can be very useful to offset up to $3k/yr of ordinary income at high marginal rates.
- Large amounts of losses to offset certain liquidity events (selling a highly appreciated house, angel investment getting bought out, etc.), particularly if you plan to never sell the stock with the now-lower basis as your heirs will get a step-up in basis
- In conjunction with charitable giving so you get a deduction for the appreciated price of the security
But basis is stepped up upon death and losses carried-forward are not inheritable (iirc), so the impact ends when you pass.
Unless you expect one of those three reasons or another strong one, I think you are better off managing gains via selecting which shares to sell via careful management of SpecID, saving yourself a bunch of time by only doing infrequent TLH when you get big declinesZZZParticipantStatus: SpousePosts: 674Joined: 06/18/2018
DAK, your post should be bookmarked for all the folks who get irrationally excited about tax loss harvesting.TimParticipantStatus: AccountantPosts: 2862Joined: 09/18/2018
Except when you rebalance. Trim gains (taxable)
add to loss positions(non taxable). The losses offset the gains + 3k. It can make rebalancing tax neutral.
Assuming you rebalance.June 7, 2019 at 5:41 am MST #219817bean1970ParticipantStatus: PhysicianPosts: 535Joined: 07/12/2017
What about TLH and people who just willy nilly lots when the market is down and don’t pay attention to ex dividend dates? Either then shifting qualified to non-qualified dividends because they didn’t hold the lot long enough (increase taxes) or potentially missing out on the dividend (less tax, but miss out on the income which for many in high tax brackets is tax advantaged for them). While the dividend income many not be hefty for many….isn’t paying non-qualified rates year after year if not paying attention to the ex dividend date somewhat tax dragging the benefit of TLH??? I don’t TLH but sometimes i hear the people complaining that they have non-qualified dividends or don’t even realized they should be getting dividends taxed at lower rates if they just held the lots longer…..June 7, 2019 at 11:12 am MST #219925afanParticipantStatus: PhysicianPosts: 82Joined: 05/07/2017
There is a great post, searchable, but perhaps on bogleheads, from an investor who signed up for one of the robo TLH services. The next January this person received an 89 page 1099, detailing the huge number of transactions. Although the service had claimed it would take into account the regular purchases in the retirement account, in fact it ignored them. So there were tons of wash sales. Unless your accountant works pro bono, it will cost a lot to review every transaction to back out the wash sales. After expenses, the gains are going to be minimal, if even positive.
If you are determined to do as much TLH as possible, then there are servicea that will do it for you, if you truat them to avoid wash sales.
Do you have some other complex business on the side? If all you have is W2 income and your taxable brokerage account, why do you need an accountant? Your taxes should be very simple. Even with all the transactions, the main job will be identifying the wash sales. This would be a classic DIY job with retail tax software.
Why in the world do you need a tax lawyer?
My suggestion: minimize the TLHing to big changes in value. Set a minimum that will be easy to track without logging in to your accounts every day. Say 15% drop in the S&P500. Do not consider TLH before that. If you do not hit that in a year and are determined to TLH something, do it once for the year in December.
Do your taxes yourself with TurboTax or the Block product. Once you get out of of all this TLH doing taxeas will take an hour, maybe less.
Stop going to a tax lawyer unless you are being sued by the IRS. Tax lawyers do not come cheap and you are highly unlikely to need one.
If you find it hard to convince yourself, add up all you have paid to the accountant and lawyer. Compare that to what you have saved in taxes. You may well be far behind on the deal.afanParticipantStatus: PhysicianPosts: 82Joined: 05/07/2017
I hope you are using no transaction fee mutual fynds rather than zero commission etfs. If you are trading etfs then you are paying spreads every time. For a buy and hold investor with liquid funds the spreads hardly matter. But with daily trading they add up.June 9, 2019 at 9:39 am MST #220371