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Tax Loss Harvesting

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  • Avatar Basil 
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    Earnest refinancing bonus

    Sorry if this issue has been explained before, but I was unable to find an answer to my specific question.

    Many have discussed that tax loss harvesting is best done by trading between two similar, but not equivalent, assets. For example, in the case of a loss, one could sell Vanguard’s S&P 500 mutual fund (VFIAX) and buy the Total Stock Market fund (VTSAX), as the price of these is usually highly correlated.

    My question is as follows: I currently own VFIAX shares in a Vanguard taxable account, but I also own VTSAX in a 403b. Would I be able to tax loss harvest the VFIAX and switch to VTSAX in the taxable account even though I already own VTSAX elsewhere? Is there any preparation etc. that I would need to be aware of to make tax loss harvesting an option in the future? Somehow the process is a little intimidating as it seems to open such doors of screwing up.

    Thanks!

    #57601 Reply
    Liked by pistolpete
    Lithium Lithium 
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    It is generally preferable to not TLH assets you also hold in your retirement accounts.  If you end up buying those assets in your retirement accounts within 30 days of selling investments in your taxable accounts, you could run afoul of the spirit of the was sale rule.

    Why do I say the “spirit of” the wash sale rule?  Because the IRS hasn’t actually clarified either way that assets in 403b or 401k accounts can violate the wash sale rule.  And even if you do, they won’t find out.  But it’s easy enough to get around that I just find a way to avoid it.

    You could just buy the equivalent Schwab fund, SWTSX, or the ETF SCHB.  IF you are at Vanguard and the purchase fee is a dealbreaker you can buy the large cap fund, VLCAX, instead of VTSAX.

    #57611 Reply
    PhysicianOnFIRE PhysicianOnFIRE 
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    Lithium’s response is spot on.

    But you won’t have an issue with a wash sale if you exchange into VTSAX even if you’ve been buying VTSAX regularly in the 403(b). It’s the fund you sell (VFIAX) that matters. You don’t want to have bought (or reinvested dividends) VFIAX elsewhere 30 days before or after taking a tax loss from VFIAX. The concern comes when you want to TLH again with the VTSAX in your taxable account, exchanging back to VFIAX in the event of a further drop in the market.

    Even then, it may not be an issue to TLH into VTSAX if you’re not contributing to VTSAX at this time of year (perhaps you frontloaded) and a quarterly dividend isn’t paid 30 days before or after you sell VTSAX in taxable.

    All that being said, I would see what other options you have in your 403(b). I went with small and mid cap US stock funds to avoid any wash sale issues.

    40-something anesthesiologist and personal finance blogger @ https://physicianonfire.com [Part of the WCI Network] Find me on Twitter: @physicianonfire

    FIRE. Financial Independence. Retire Early.

    #57615 Reply
    Avatar Basil 
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    Thanks for the excellent responses! Lithium mentioned buying the equivalent Schwab fund as an example. Are there rules as to how similar the two funds can or cannot be? Would something as simple as buying a different companies (eg. Fidelity, Schwab, etc) index fund work?

    #57693 Reply
    Lithium Lithium 
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    Joined: 02/15/2016

    The IRS hasn’t defined what “substantially identical” means, so this is another chore that falls to you.  The rule of thumb that most go by is not to TLH between two funds that track the same index (i.e. don’t buy a different S&P 500 index fund).  But if you buy a TSM fund you should be fine, and the Vanguard and Schwab TSM funds track different indices.  Fidelity probably tracks a different one too, but worth looking up if you ever think of using it.

    #57733 Reply
    Avatar DSM 
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    Status: Physician
    Posts: 40
    Joined: 05/26/2017

    I did TLH couple days ago for the first time. I also have a couple of questions.

    I only have mutual funds in my taxable account. What would be the good time to check the market situation in the day(@EST) so that I can exchange/sell the fund to get that day’s low price? This time I got to know the market drop at the end of the day and requested the fund exchange. Vanguard didn’t show the change until the end of the next day. I wanted to use admiral mutual fund rather than ETF(to prevent cost associated with bid-ask spread) as I deposit some amount each month.

    My 2nd question: Is the possibility of TLH decreases with time(hopefully with the positive market) as the cost basis becomes net positive? Is there a value to open new mutual funds with each money deposit so that TLH can be used if the market drop occurs?

    Thank you for your help!

    #57739 Reply
    childay childay 
    Participant
    Status: Physician
    Posts: 1071
    Joined: 01/09/2016

    I did TLH couple days ago for the first time. I also have a couple of questions.

    I only have mutual funds in my taxable account. What would be the good time to check the market situation in the day(@EST) so that I can exchange/sell the fund to get that day’s low price? This time I got to know the market drop at the end of the day and requested the fund exchange. Vanguard didn’t show the change until the end of the next day. I wanted to use admiral mutual fund rather than ETF(to prevent cost associated with bid-ask spread) as I deposit some amount each month.

    My 2nd question: Is the possibility of TLH decreases with time(hopefully with the positive market) as the cost basis becomes net positive? Is there a value to open new mutual funds with each money deposit so that TLH can be used if the market drop occurs?

    Thank you for your help!

    Click to expand…

    I myself use ETFs to prevent the situation you mention with mutual funds.  I don’t think it matters what time of day you sell, as the price will be set when the market closes that day.  So you need to put in your order before the market close to not have to wait another day..

    For the second question make sure all your taxable funds are set to “specific ID” under the cost basis.  That way you can just sell the lots which are down.  But yes over time likelihood of TLH does decrease.

     

    #57766 Reply
    The White Coat Investor The White Coat Investor 
    Keymaster
    Status: Physician
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    Joined: 05/13/2011

    First of all, there’s not much to screw up. You might have your tax loss disallowed, but that’s as bad as a screw-up goes. It’s a pretty minor tax benefit for most. Definitely not worth losing much sleep over.

    Second, even if you screw up, the IRS probably won’t notice if your wash is caused by something you own in a retirement account because nobody ever tells them what you own in a retirement account. You don’t, and neither does the brokerage. I can’t even imagine an auditor asking you what you own in a retirement account. So I think those who get really crazy about this are just kind of TLH Nazis. The unfortunate side effect that they have on some who don’t really have a handle on it is that they prevent them from TLHing out of fear of screwing it up or worse prevent them from even investing in a taxable account or hiring an advisor to do it for them that they don’t really need. You can screw up a lot of tax loss harvesting for what an advisor costs.

    Site/Forum Owner, Emergency Physician, Blogger, and author of The White Coat Investor: A Doctor's Guide to Personal Finance and Investing
    Helping Those Who Wear The White Coat Get A "Fair Shake" on Wall Street since 2011

    #57783 Reply
    Avatar Dr P 
    Participant
    Status: Physician
    Posts: 56
    Joined: 08/06/2016

    I’ve been investing in vanguard index funds for the past couple years but haven’t attempted to TLH yet.  I have been dollar cost averaging and haven’t sold any shares.  I probably should know this, but is there a lot of downside to buying and holding without TLH?

     

    I own a fund in my taxable account the contains total domestic and international bond funds.  In previous threads, it’s been recommended I don’t invest further in this fund due to the poor tax liability.  I’m curious if you think it would be wise to begin selling off this fund and buying back the component stock funds and if so, should I do this when there is a dip to take advantage of TLH?

     

    Thanks

    #57856 Reply
    Avatar Basil 
    Participant
    Status: Resident
    Posts: 47
    Joined: 08/06/2017

    Thanks to WCI, PoF, and everyone else on this helpful forum! Given the recent drop in international stock prices, I harvested losses from the Vanguard Total International Index for the first time. Here are two helpful links that walked me through it in case anyone else is new to the concept.

     

    Tax Loss Harvesting at Vanguard – A Primer

    Tax Loss Harvesting with Vanguard: A Step by Step Guide

    #144146 Reply
    Liked by childay

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