By Dr. Jim Dahle, WCI FounderA frequent request from investors who recently learned about tax-loss harvesting is for a list of “tax-loss harvesting pairs.” Unfortunately, this issue is not so simple that one can just issue a list without any explanation whatsoever. The list varies by asset class, by where your taxable account is located, by whether you are using traditional mutual funds or ETFs, and by what investments you hold in your IRAs (and depending on how you feel about the spirit of the law, your 401(k)s, HSAs, 529s, etc.).
What Is Tax-Loss Harvesting?
Tax-loss harvesting is intentionally selling shares of a security (stock, mutual fund, or ETF) with a loss in order to use that loss against capital gains and up to $3,000 per year of ordinary income on your tax return. If you have a $30,000 capital gain and book a $40,000 loss that same year, you do not have to pay capital gains taxes on that $30,000 gain (reducing your tax bill by as much as $7,140). You can apply $3,000 of the capital loss to your ordinary income (reducing your tax bill by as much as $1,623), and you can carry forward the remaining $7,000 in loss indefinitely until you can use it. You need to ensure that you do not perform a “wash sale” (when you buy shares of a security within 31 days before or after selling other shares of that security) and that you do not turn what would otherwise be a qualified dividend into an unqualified dividend by holding that security for less than 60 days around the ex-div date. The IRS has specifically said that buying a security within an IRA while selling it in a taxable account constitutes a wash sale, so be careful if you have the same holding in an IRA and a taxable account—especially if you are reinvesting dividends. The IRS has not specifically said that about HSAs, 529s, 401(k)s, or other employer-provided retirement accounts.
Tax losses are useful to offset a little bit of ordinary income; the usual capital gains that occur from time to time for investors; and large capital gains that may be due from the sale of a business, investment property, or a highly appreciated home.
Why Do You Need a Tax-Loss Harvesting Partner (or Pair)?
To avoid a wash sale, you have to wait 31 days after selling a security before buying it back. Since tax-loss harvesting usually occurs after a sharp decline in market value, the most likely thing for that security to do in the next 31 days is to increase in value. You're shooting yourself in the foot selling low if you're just going to turn around and buy those shares back at a higher price 31 days later. Maybe you get lucky and the shares are even cheaper in 31 days, but I wouldn't count on it.
A better plan is to simply sell one security and buy another one at the same time. You want this security to be similar to and, in fact, to have correlation with the original security of better than 0.99. But it cannot be, in the words of the IRS, “substantially identical.” For practical purposes, substantially identical means the exact same thing, i.e. a security with the same CUSIP number. You cannot exchange the mutual fund share class of the Vanguard Total Stock Market Index Fund (VTSAX) for the ETF share class (VTI) of that same fund. But you could exchange VTSAX for the 500 Index Fund or the Large Cap Index Fund. You could exchange VTI for the iShares version of a Total Stock Market ETF (ITOT).
Lots of people worry that, in an audit, the IRS would look closely at this issue and declare those losses invalid due to the securities being substantially identical. This seems extremely unlikely to me for several reasons:
- I've asked for years if anyone knows anyone that this has happened to, and I have yet to find a single investor.
- The IRS has far better things to do. There are people out there just totally cheating on their taxes that need to be caught.
- This doesn't make a big difference for many people. The losses aren't that big, and if they sell the security later, they're just delaying the taxes anyway.
- Understanding this requires a certain level of sophistication that many IRS auditors simply don't have.
If the brokerage is not reporting it as a wash sale on your tax paperwork, nobody else cares. Unless your IRA is at the same custodian, nobody (including you) is likely to notice an inadvertent wash sale.
So, if you want to do tax-loss harvesting, you're going to need a substitute investment to swap into.
More information here:
Is Tax-Loss Harvesting Worth It?
Why You Just Need 1 Tax-Loss Harvesting Pair per Asset Class
Some people think they need three, four, or even five tax-loss harvesting partners in an asset class. What if you tax-loss harvest and then it drops again in value before 31 days have passed? Don't you want to capture that loss too? Having done this dozens of times in my investing career, the answer is no. You don't. This is a good place in personal finance to be a satisficer and not an optimizer. It takes time and effort to monitor markets and go in and physically make the trades, and the more of them that you make, the more likely you are to accidentally create a wash sale or turn a qualified dividend into an unqualified one.
Your goal is simply to collect the BIG losses available to you over the years as you invest. Those typically only occur in the bear markets that occur on average about once every three years. If the downturn lasts longer than a couple of months, sure, tax-loss harvest those shares back to the original holding. If it goes two more months and continues to trend down, then exchange into the partner again. But frenetically tax-loss harvesting every few days (much less hiring a robo advisor to do it for you multiple times a day) is overkill. You can get 95% of the benefit with 2% of the work.
What Is an Ideal Tax-Loss Harvesting Partner?
The ideal partner
- Has the same structure (traditional fund or ETF) as the original security,
- Is free to buy and sell (with the possible exception of a small bid/ask spread),
- Is highly liquid,
- Has 0.99 correlation with the original security, and
- Is an investment you would be willing to hold the rest of your life (broadly diversified, low cost, etc.) or for which you have a plan to get rid of (donate to charity after one year).
What Asset Classes Are You Likely to Need a Partner For?
If you don't have a taxable account or do not wish to tax-loss harvest, you don't need a tax-loss harvesting partner at all. However, for every asset class in your taxable account which can be easily tax-loss harvested and which is likely to have a loss from time to time, you need a partner. For the most part, we're talking about tax-efficient stock asset classes like a Total Stock Market Fund or a Total International Stock Market Fund.
In 2022, however, many of those who owned municipal bond funds also had significant harvestable losses. Some people with a large taxable-to-tax-protected ratio in their portfolios may have other asset classes in taxable such as small value funds, small international funds, emerging market funds, or even REITs.
Note that tax-loss harvesting with individual stocks is much harder than with index mutual funds or ETFs. While you can tax-loss harvest from Facebook to Twitter or Home Depot to Lowe's, they are not even close to 99% correlated. You shouldn't be investing in individual stocks anyway. Speaking of investments you shouldn't be buying, you also do not need a partner for cryptoassets. You can simply buy back the Bitcoin immediately after selling it without creating a wash sale. Nobody really tax-loss harvests privately traded real estate either. The liquidity is too low, and the transaction costs are too high. This is really only done with publicly traded securities.
Where Are the Best Places to Look for Tax-Loss Harvesting Partners?
As a general rule, you're going to look at the same places you would look for investments originally. We're talking about index mutual funds from Vanguard, Fidelity, and Schwab. We're talking about ETFs from Vanguard, BlackRock, State Street, Fidelity, Schwab, DFA, and Avantis. Most white coat investors investing in traditional mutual funds do so at Vanguard, and luckily, Vanguard has at least two highly correlated funds within each major asset class. White coat investors who use ETFs tend to use a Vanguard ETF and either another Vanguard ETF or a BlackRock (iShares) ETF—whether their money is held at Vanguard, Fidelity, Schwab, eTrade, or somewhere else. This just isn't that complicated most of the time. If you're having a hard time finding a tax-loss harvesting partner, you should probably ask yourself whether you should be investing in that asset class in the first place.
What Tax-Loss Harvesting Partners Do the Dahles Actually Use?
As a reminder, our asset allocation is as follows:
60% stocks, 20% bonds, 20% real estate broken down as:
- 25% Total US Stock Market
- 15% Small Value Stocks
- 15% Total International Stock Market
- 5% Small International Stocks
- 10% Nominal Bonds (split between the TSP G Fund and a Vanguard intermediate muni bond fund)
- 10% Inflation Indexed Bonds (split between the Schwab TIPS ETF, individual TIPS at TreasuryDirect, and I Bonds)
- 5% Publicly traded REIT Index Fund
- 10% Private Equity Real Estate (split between various funds, REITs, and syndications)
- 5% Private Debt Real Estate (split between three funds)
In recent years, our taxable-to-tax-protected ratio has increased dramatically. Now, the following asset classes are in taxable:
- Total US Stock Market
- Total International Stock Market
- Small International Stocks
- Private Equity Real Estate
- Most of our Small Value Stocks
- Most of our Nominal Bonds
- Some of our TIPS and all of our I Bonds
- Some of our Private Debt Real Estate
The private equity real estate, private debt real estate, and I Bonds really don't lend themselves to tax-loss harvesting. That leaves us six investments for which we need tax-loss harvesting partners—of the six listed below, we've tax-loss harvested five of them (all except the TIPS) in the last year, so these are the actual partners we use.
These funds are all very liquid, very low cost, and very broadly diversified, and I am perfectly happy to hold any of them for the rest of my life. The only one I am not totally satisfied with is SCHC since VSS includes emerging markets and SCHC does not. Some people prefer smaller and more value-y small value funds. I am content with these.
More information here:
The Case Against Tax-Loss Harvesting
Tax-Loss Harvesting with Fidelity
How to Tax-Loss Harvest with Vanguard
What Should You Use?
Now that you have all of the information you need, let's make that list you requested of possible tax-loss harvesting partners to consider.
US Stocks/Large Cap
There are a gazillion potential options for this asset class in both traditional mutual fund and ETF forms. Here is a partial list of great choices:
Funds:
- Vanguard Total Stock Market Fund Admiral (VTSAX)
- Vanguard Large Cap Index Fund Admiral (VLCAX)
- Vanguard 500 Index Fund Admiral (VFIAX)
- Fidelity Total Market Index Fund (FSKAX)
- Fidelity Zero Total Market Index Fund (FZROX)
- Fidelity 500 Index Fund (FXAIX)
- Fidelity Zero Large Cap Index Fund (FNILX)
- Schwab Total Stock Market Index Fund (SWTSX)
- Schwab S&P 500 Index Fund (SWPPX)
ETFs:
- Vanguard Total Stock Market ETF (VTI)
- Vanguard Russell 1000 ETF (VONE)
- Vanguard Large Cap ETF (VV)
- Vanguard S&P 500 ETF (VOO)
- Vanguard Mega Cap ETF (MGC)
- iShares Total Stock Market ETF (ITOT)
- iShares Russell 3000 ETF (IWV)
- iShares Russell 1000 ETF (IWB)
- iShares S&P 100 ETF (OEF)
- iShares Cores S&P 500 ETF (IVV)
- SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM)
- SPDR S&P 500 ETF Trust (SPY)
- SPDR Portfolio S&P 500 ETF (SPLG)
- SPDR Dow Jones Industrial Average ETF Trust (DIA)
- Schwab US Broad Market ETF (SCHB)
- Schwab US Large Cap ETF (SCHX)
- Schwab 1000 Index ETF (SCHK)
See my point? There is no shortage here. There are probably a dozen more reasonable choices for a “total stock market” substitute. These are all low cost and broadly diversified, and they all have 99% correlation with each other.
International Stocks/Large Cap
Fewer choices here, but still plenty whether you use funds or ETFs.
Funds:
- Vanguard Total International Stock Index Fund Admiral (VTIAX)
- Vanguard FTSE All-World Ex US Index Fund Admiral (VFWAX)
- Fidelity Total International Index Fund (FTIHX)
- Fidelity Zero International Index Fund (FZILX)
- Schwab International Index Fund (SWISX)
ETFs:
- Vanguard Total International Stock ETF (VXUS)
- Vanguard FTSE All World Ex-US ETF (VEU)
- iShares Core MSCI Total International Stock Index ETF (IXUS)
- Schwab International Equity ETF (SCHF)
We're already done for most of you. Since most investors have a significant portion of their portfolio in retirement accounts and since TSM and TISM make up a large portion of most portfolios, chances are you don't need any more than the partners above. But if you have a particularly complex portfolio, continue reading. Recognize that the more esoteric the asset classes you are using, the more likely it is your investment and its partner will be an ETF.
US Nominal Bonds (Taxable)
Very few people hold this asset class in a taxable account. Those in a low enough tax bracket to make it a proper holding generally don't have much of a taxable account. But we'll identify a few partners anyway.
Funds:
- Vanguard Total Bond Market Index Fund Admiral (VBTLX)
- Vanguard Intermediate-Term Bond Index Fund Admiral (VBILX)
- Fidelity US Bond Index Fund (FXNAX)
- Fidelity Total Bond Fund (FTBFX)
- Schwab US Aggregate Bond Index Fund (SWAGX)
ETFs:
- Vanguard Total Bond Market ETF (BND)
- Vanguard Intermediate-Term Bond ETF (BIV)
- iShares Core US Aggregate Bond ETF (AGG)
- iShares Core Total USD Bond Market ETF (IUSB)
- Fidelity Total Bond ETF (FBND)
- Schwab US Aggregate Bond ETF (SCHZ)
- SPDR Portfolio Aggregate Bond ETF (SPAB)
Lots of options for something few ask for.
Municipal Bonds
While it is unusual to tax-loss harvest bonds at all, the bonds most likely to show up in a taxable portfolio are muni bonds. Individual munis aren't a great holding (for more reasons than the illiquidity preventing easy tax-loss harvesting), so we're just talking about funds here.
Funds:
- Vanguard Intermediate Term Tax-Exempt Admiral (VWIUX)
- Vanguard Tax-Exempt Bond Index Admiral (VTEAX)
- Schwab Tax-Free Bond Fund (SWNTX)
- Fidelity Tax-Free Bond Fund (FTABX)
ETFs:
- Vanguard Tax-Exempt Bond ETF (VTEB)
- Schwab Municipal Bond ETF (SCMB)
- iShares National Muni Bond ETF (MUB)
- SPDR Nuveen Bloomberg Municipal Bond ETF (TFI)
- SPDR Nuveen Muncipal Bond ETF (MBND)
- Avantis Core Municipal Fixed Income ETF (AVMU)
International Bonds
Let's do international bonds while we're at it. If you wanted to split bonds up into short-term and long-term bonds, corporate, Treasury, and mortgage-backed bonds, etc., we could also do that. You would find 2-3 good choices in each category from the usual places.
Funds:
- Vanguard Total International Bond Index Fund Admiral (VTABX)
- Fidelity International Bond Index Fund (FBIIX)
ETFs:
- Vanguard Total International ETF (BNDX)
- iShares Core International Aggregate Bond ETF (IAGG)
Large, Mid, Small, Value, Growth Stocks
We could also do this for every category from large growth stocks to small value stocks. The process would be mostly the same, so let's just do it for one of the most common “tilts” out there: small value. I highly recommend ETFs over funds in these types of asset classes. You will have many more good choices.
Funds:
- Vanguard Small Cap Value Index Fund Admiral (VSIAX)
- Fidelity Small Cap Value Index Fund (FISVX)
ETFs:
- Vanguard Small Cap Value ETF (VBR)
- Vanguard Small Cap S&P 600 Value ETF (VIOV)
- Vanguard Russell 2000 Value ETF (VTWV)
- iShares S&P Small Cap 600 Value ETF (IJS)
- SPDR S&P 600 Small Cap Value ETF (SLYV)
- DFA US Small Cap Value ETF (DFSV)
- Avantis US Small Cap Value ETF (AVUV)
- Wisdomtree US Small Cap Dividend ETF (DES)
REITs
REITs are generally considered fairly tax-inefficient and are usually one of the last asset classes to be moved to taxable. However, their income is eligible for the 199A deduction through 2025 and part of their yield is depreciation passed through in the form of a non-taxable return of capital distribution, so maybe they're not as bad as is classically taught. If you hold REITs in taxable, you're almost surely going to want to tax-loss harvest them from time to time since their share price can be quite volatile. Again, an ETF makes sense here in taxable.
Funds:
- Vanguard Real Estate Index Fund Admiral (VGSLX)
- Fidelity Real Estate Index Fund (FSRNX)
ETFs:
- Vanguard Real Estate ETF (VNQ)
- Schwab US REIT ETF (SCHH)
- iShares Core US REIT ETF (USRT)
- iShares Cohen & Steers REIT ETF (ICF)
- iShares US Real Estate ETF (IYR)
- SPDR Dow Jones REIT ETF (RWR)
- Fidelity MSCI Real Estate Index ETF (FREL)
- Fidelity Real Estate Investment ETF (FPRO)
- DFA US Real Estate Index ETF (DFAR)
- Avantis Real Estate ETF (AVRE)
TIPS
These are not frequently held in taxable, and they don't usually have big losses to harvest anyway. But if you are in taxable, you have a few choices. You can invest directly into TIPS at auction at TreasuryDirect. If you have a loss, sell what you own and buy the next TIPS available at auction. It won't be exactly the same, but it would work. If you're buying individual TIPS on the secondary market at Vanguard, Fidelity, Schwab, or another brokerage, you could sell a TIPS you own and simply buy a similar one issued a year earlier or a year later. It would be a little more convenient to use a fund or preferably an ETF if you really plan to tax-loss harvest with minimal cost. Note that these options are all for intermediate-term TIPS. There is also a decent set of funds (mostly ETFs) for short-term TIPS including one from Vanguard.
Funds:
- Vanguard Inflation-Protected Securities Fund Admiral (VAIPX)
- Fidelity Inflation-Protected Bond Index Fund (FIPDX)
- Schwab Treasury Inflation Protected Securities Index Fund (SWRSX)
ETFs:
- Schwab US TIPS ETF (SCHP)
- iShares TIPS Bond ETF (TIP)
- SPDR Portfolio TIPS ETF (SPIP)
- SPDR Bloomberg 1-10 Years TIPS ETF (TIPX)
Small International
Few mutual fund houses have more than one of these, so your best bet is again going to be an ETF to minimize transaction costs and maximize tax-efficiency.
Funds:
- Vanguard FTSE All-World Ex-US Small Cap Index Fund Admiral (VFWAX)
- Fidelity International Small Cap Fund (FISMX)
ETFs:
- Vanguard FTSE All-World Ex-US Small Cap ETF (VSS)
- Schwab International Small Cap Equity ETF (SCHC)
- iShares MSCI EAFE Small Cap ETF (SCZ)
- SPDR S&P International Small Cap ETF (GWX)
Emerging Markets
Quite a few choices here, but given that most mutual fund companies only have one, you're again probably going to want to use the ETF if investing in this asset class in taxable.
Funds:
- Vanguard Emerging Markets Stock Index Fund Admiral (VEMAX)
- Fidelity Emerging Markets Index Fund (FPADX)
ETFs:
- Vanguard FTSE Emerging Markets ETF (VWO)
- iShares Core MSCI Emerging Markets ETF (IEMG)
- iShares MSCI Emerging Markets ETF (EEM)
- SPDR Portfolio Emerging Markets ETF (SPEM)
- Avantis Emerging Markets Equity ETF (AVEM)
- DFA Emerging Core Equity Market ETF (DFAE)
- Schwab Emerging Markets Equity ETF (SCHE)
International Small Value
Now we've gotten to the point where Vanguard doesn't even have an index fund in this asset class. Use an ETF.
ETFs:
- DFA International Small Cap Value ETF (DISV)
- Avantis International Small Cap Value ETF (AVDV)
- Schwab Fundamental International Small Company Index ETF (FNDC)
- WisdomTree International Small Cap Dividend ETF (DLS)
We could keep going with this exercise, but I think it's clear at this point how I'm doing it. Select the asset class. Then, check with all of the usual low-cost index fund/ETF providers for whether they have a fund/ETF in that asset class. If there are multiple, choose based on convenience, cost, and liquidity.
What do you think? What tax-loss harvesting partners do you use? Do you need help choosing between the options above? Is there an asset class not listed above where you could use help finding potential partners?
“The IRS has specifically said that buying a security within an IRA while selling it in a taxable account constitutes a wash sale, so be careful if you have the same holding in an IRA and a taxable account—especially if you are reinvesting dividends.” So as a retiree not tapping my IRAs yet and with automatic reinvestment for them, but selling some of our taxable holdings as our retirement spend down, I have to worry about THIS also? I’ll ignore it unless I get really bored or they squawk at me. But maybe next year I will time my taxable shares sales far enough away from expected distributions. I am already timing them to postpone the estimated tax due on the sale another 2-4 months when I’m close to the end of the estimated tax window.
No, never mind! My only losses are in a few funds I’m not replacing to follow our investment plan- to decrease number of funds for simplicity and to rebalance to our planned %ages. I’ll keep this in mind if we are ever selling shares of our final few funds at a loss (unlikely except for the shares bought that quarter with reinvestment plans- so that’s an added bonus that per our plan, most of our distributions are now swept into a cash account rather than reinvested).
Also thanks for teaching me a new word (satisficer).
Only if you’re selling at a loss and want to claim that loss.
I have bonds in a taxable account (vbtlx and vfsux) and wonder if I can tax loss harvest by buying vtsax with these shares if I want to move more into stock funds.
I wasn’t sure why you said we want to have a partner in the same asset class. I would like to understand that part better.
The reason to partner TLH is that you don’t want the tax loss harvesting decision to impact your preferred asset allocation. If you wait 30 days then you risk the market moving while you are out so you purchase a similar partner immediately instead of waiting. If you are deciding to change asset allocation to put more in stocks then selling those bond funds makes sense for that reason alone and the realized loss is just a little extra benefit.
Thanks! That makes sense now.
Yes, you can sell and book the loss but I wouldn’t really call it tax loss harvesting if you are selling and not buying something similar.
The point of TLHing is to book the loss without changing your asset allocation.
“The point of TLHing is to book the loss without changing your asset allocation.”
True, but selling shares of Fund A which have declined in value and then putting the money into Fund B (which is very different from Fund A) can also be a nice trick to use when you either want to rebalance your taxable account or to change the asset allocation without taking a tax hit.
100% agree.
I thought WCI was using AVUV/DFSV not VBR/VIOV, at least for new money? And AVDV/DISV not VSS/SCHC?
Yea! Why isn’t this editor running these posts in the order I wrote them!
The change from VBR/VIOV to AVUV/DFSV and from VSS/SCHC to AVDV/DISV has been taking place only in the last couple of months and won’t be complete for years and this post was written before that. More detail in a post that runs next week that I just wrote this weekend.
So I have VTSAX in my taxable account and VFIAX in both my 401k & IRAs.
Can I still use VLCAX as a good TLH partner for VTSAX or is VLCAX too identical to VFIAX which I hold in the IRA?
They’re all good TLHing partners.
Thanks for these articles. However, one thing that never gets addressed in these round ups about TLH are the pitfalls that can derail and lead to wash sales or complications when it comes to tax filing.
One major thing that I never understood definitely 100% is that issue when you have multiple lots purchased within the 30 days PRIOR to the sale. The wash sale rules state apply when 30 days BEFORE and 30 days AFTER. For a person who dollar cost averages or steadily purchases in the market, it can be a nightmare to figure out which lots get “matched” and which trigger a wash sale. (I.e. You purchase XYZ stock Dec 3, Dec 7, Dec 16, but then you want to sell and TLH Dec 27 that may be at a loss for lots Dec 7, and Dec 16, but not Dec 3.) What if you sell all lots simlutaneously at a loss Dec 27th, but the brokerage processes them in different order and then flags one or two of these lots as a wash sale in their tax forms, which I understand can come to be classed as an “irrelevant wash sale” and can still be TLH come tax time, but still requires some explaining to do.
Second, if you have dividends on auto-reinvest, in ANY of your accounts (IRA and taxable) of the same stock/ETF, you then have those subject to wash sales. However since the dividend yields typically low and it would only be a small percentage that gets disallowed. No biggie financially, but still another annoyance come tax time.
There just seem to be a lot of common scenarios that happen when folks try to TLH but the logistics/operations and specifics to each brokerage that make it more complicated. None of the blogs tend to cover these in detail and it might be a good service to your readers to flag them. If you have any insight, please kindly share!
Lastly: any suggestions for an TLH partner for QQQ? The VGT, FTEC and XLK all seem quite different and more concentrated than QQQ in top stocks/tech, yet QQQM seems firmly into the “substantially identical,” category.
You can avoid most issues by just not doing it frenetically. If you never tax loss harvest more frequently than once every couple of months and you don’t invest frenetically (i.e. more than about once a month) these issues are really very minimal, especially if you don’t have the same investments in your IRAs as taxable.
I don’t really recommend QQQ as an investment and lack of a good TLHing partner is a very minor reason why. I bet the IRS wouldn’t give you a hard time about QQQM, but I agree that I might not try that one. If I were you, I’d ask yourself why you’re using QQQ in the first place. It’s not a broad index like VTI so if you’re looking for a tech tilt for some reason, why not switch to a couple of tech ETFs. If you want a large growth tilt, switch to a couple of large growth ETFs etc.
Thank you for responding and your thoughts. Not a frenetic investor but as mentioned if you are dollar costing within a month these scenarios do happen during a choppy market. I suppose most people DCA timed to a bi-monthly or monthly paychecks, but my income is lumpy throughout the year.
There are corrections along the way that last only a couple of months or less and that’s when these issues happen. I DCA’d (almost every other day) smaller amounts of VOO in late Sept – mid Oct, and almost decided to TLH to VTI when it hit a new low in Oct. But suddenly the market roared late Oct and I was suddenly up 10%+ rather than harvesting a 3-4% loss. Of course then I wished I had purchased more in Sept-Oct, but of course you can never really time the market, even while DCA!
Perhaps it’s just too specific for most folks, since it may not be a common scenario for average retail investors, but I just found it hard to get a really easy to understand article on 1) the explanation of the 30 days BEFORE rule on wash sales, and 2) multiple lots issues.
That’s exactly my point. Don’t “dollar cost average” (you really mean periodic investing) frequently in your taxable account. For example, I might only buy 4 lots a year of a given fund rather than putting money every two weeks into every fund. Touching my investment accounts every other day would keep me from living the lifestyle I desire. Last year I think I tax loss harvested once. In 2022 maybe 4 times. You can do that and it only costs you maybe 5% of the losses you could have harvested by watching every day or hiring a computer to do it for you.
Alas, I am not as brave or disciplined as you. I don’t invest frequently (maybe twice a year) but when I do, I find it hard to lump sum it and DCA/Periodic over 2-6 weeks. These are trust distributions (of which I am the trustee of the family trust), and inheritance distributions, so they are large (for me anyway). It’s hard to plonk 6 figures+ in one day in one transaction.
During your 4+ transactions in 2022, did you time it or invest as funds became available? How did you pick your entry point? I imagine if it was spaced out over 2022, you’d have done much better than one transaction in Jan 2022.
Thank you again, I follow WCI quite religiously and find the comments from readers helpful!
I guess if it makes you feel better, go for it. But 2-6 weeks is basically the same thing as all at once as far as I’m concerned. I think it might help if you say out loud what you’re afraid of that’s causing you to do that and maybe even write it down. It won’t seem so big then. This article might help too:
https://www.whitecoatinvestor.com/dollar-cost-averaging-is-for-wimps/
Trust me when I say it gets easier to “plomp” six or even seven figures all at once the more you do it. I “plomp” six figures every month with something whether it’s investing or tax loss harvesting or doing a rollover or something. Some TLHing transactions are 7 figures. I plomp them too. When I started I was plomping 4 figures, then 5, then 6, then 7. It’s really the same game.
I don’t try to time the markets. I invest when funds are available. Funds are available for me to invest every month so over time sometimes I’m buying low and sometimes I’m buying high but over the decades, plomping it all at once every time I get it not only works out better mathematically, but it’s far less effort and far less worry for me. But do whatever works for you. As I said, 2-6 weeks is basically the same thing as doing it all right now as far as the math goes. I’d try to talk you out of a 5 year DCA schedule but I’m not going to spend much effort talking you out of a 6 week one if it provides psychological comfort. Investing is more about behavior than math anyway.
For every 2022 when DCAing would come out ahead, there will be a 2021 and a 2023 when it doesn’t since the market goes up most of the time. Barring a functional crystal ball, there is no doubt that lump summing every time you get a lump sum will be the right move on average.
VERY helpful to hear how you approach it. Appreciate the refresher link..only discovered WCI 2 years ago. A lot of your readers reacted to that article so it’s a perennial issue.
The framing of going from 4 to 5 to 6 to 7 figures speaks to practice and acquiring confidence, and I’ve had a similar journey, up to the 7 figure point. Never had 7 figures before to lump sum invest, topped with niggling doubts whether I should stick to my original asset allocation in early retirement. Idea of TLH makes it easier since I can bank some capital losses if bad timing. Clearly I need to lump sum it next time and not muck it up with periodic investing.
Thanks for the diagnosis and the treatment plan.
Periodic investing = What most people do: invest every month when they make more money. Similar effect to dollar cost averaging as you sometimes get a better price on shares (and thus buy more shares with the same amount of money) when the market drops.
When you have a lump sum to invest, you have two choices. You can lump sum it or you can dollar cost average it in over time. I generally recommend lump summing it.
I think it helps to actually get used to losing money, i.e. watching account balances drop. After you see it happen enough times (and subsequently recover) it bothers you a lot less when it does happen.
Hi there. I finally decided to open a taxable account. These are the funds that I’m thinking of investing into. Would you please look these over and let me know what you think. Thank you for all the help.
30% – Vanguard Total Stock Market Fund
Vanguard Total Stock Market ETF – VTI
iShares Trust Core S&P Total US Stock Market ETF (ITOT)
20% Vanguard Small Cap Value Index Fund
Vanguard Small-Cap Value ETF – VBR
Vanguard S&P Small-Cap 600 Value ETF (VIOV)
15% Vanguard Total International Stock Market Fund
Vanguard Total International Stock ETF – VXUS
iShares Core MSCI Total International Stock ETF (IXUS)
5% Vanguard FTSE Ex-US Small Index Fund
Vanguard FTSE All-World ex-US Small-Cap ETF – VSS
Schwab International Small Cap Equity ETF (SCHC)
10% Vanguard Inflation-Protected Securities Fund (TIPS)
Vanguard Short-Term Inflation-Protected Securities ETF – VTIP
Schwab US TIPS ETF (SCHP)
10% Vanguard Intermediate Tax-Exempt Bond Fund
Vanguard Tax-Exempt Bond ETF – VTEB
iShare Trust National Muni Bond ETF (MUB)
10% Vanguard REIT Index Fund
Vanguard Real Estate ETF – VNQ
iShare Core US REIT ETF (USRT)
You probably don’t need all those in your taxable account. Can’t you put some of your asset classes into tax protected accounts?
I opened individual 401k last year for my 1099. I’m using Vanguard REIT Index Fund and Vanguard growth fund there. I was hoping to start a taxable account too.
Yes, those funds are fine. But the way this works for most people is if they’ve got 6 asset classes in their portfolio, they might only have 1-3 in their taxable account. It depends on the size of your taxable to your tax protected account. For example, my portfolio is now mostly taxable, so I have most stuff in taxable. But there was a time when I had nothing in taxable. So it has been a gradual transition moving asset classes out of tax protected and into taxable one by one. So at one point I only needed one asset class in taxable. You might be at that point. You don’t need everything you own in taxable.
I also forgot to ask. Do you think above funds are reasonable in terms of primary and a mirror to tax-loss harvest in the future? Thank you for all the help.
Is there a need to purchase the tax-loss harvesting pair at the outset? Or just when you need it?
When you need it. I try NOT to use it. Transfer back to the original when able at a loss and I preferentially donate the partner shares or other legacy investments to get rid of it. It’s acceptable, but still second best.
Sorry for the rookie question. I currently hold VXUS in my tax advantaged accounts. Would you recommend choosing TLH partners for taxable that are both different then VXUS? If I held IXUS in taxable, for example, and then purchased VXUS after selling IXUS at a loss, I would now be in danger of triggering a wash sale if I needed to tax loss harvest again. Thanks for your help.
JL
Just gotta be careful if you use the same fund in both. It’s not like it’s a mystery when you bought VXUS in your IRA last. Don’t forget that wash sales don’t apply to 401(k)s/403(b)s, only IRAs. At least under current IRS guidance.
My questions relate to what to do with the money in my tax loss harvesting pairs. Most of the money in my brokerage account is in VTSAX. I tax loss harvested in 2022 and now have quite a bit in VFIAX and a smaller amount in VLCAX. My questions are: 1) Should I just leave the money as is in those three funds? 2) Or should exchange the money in those two partners back to VTSAX? 3) If so, can that be done at any time as long as I’m past any wash sale window? Thanks. Mark
1) Usually because they have gains.
2) Sure, if there are losses or no significant gains. This is why you really need to only TLH into stuff you’re willing to own forever.
3) It can be, but most wouldn’t if there are gains.
Hi there.
Thank you for all of your help. I’m new to this. I opened my taxable account a year ago. I invest every month as I get paid with few days window before and after. So sometime I purchase the same index funds 30 days. This month I purchased more funds because the market is down and I had money available to invest. I usually purchase all the funds at a time in respective percentages. I’m guessing the way I’m investing every month will likely result in a wash sale unless I make sure that each purchase is done at least 30days apart. Is that true? Any other strategy you would recommend to be able to TLH? How do you work in the extra purchases that you make during down time if your plans calls for it?
Thank you for all the help.
If you sell all the shares you bought within the last 30 days, that should avoid a wash sale. At any rate, there probably isn’t a rush unless this is a very short term decline a la 2020. You may just have an even bigger loss to harvest in another month.
You can also put the new purchases into the tax loss harvesting partner.
Thank you for this post. How confident are you that funds like ITOT and VTI are not substantially identical? I’ve found roboadvisors like Wealthfront are publicly advertising this same pairing. Would this hold up in an audit? What are the consequences of it not holding up? Thank you again.
Thank you for this post. How confident are you that funds like ITOT and VTI are not substantially identical? I’ve found roboadvisors like Wealthfront are publicly advertising this same pairing. Would this hold up in an audit? What are the consequences of it not holding up? Thank you again.
I don’t know anyone who knows anyone who has ever been audited on this point. If it doesn’t hold up your loss would not be allowed and your basis would be reset.
The IRS doesn’t look at this very closely but hasn’t ever described what substantially identical really means. I could argue they’re not substantially identical and would be comfortable doing that. Not sure if you feel the same way or not. If not, use a S&P 500 fund or something else.
In the past year I’ve started growing our taxable account which is:
50% VTI Vanguard Total US Stock Market
30% VXUS Vanguard Total International Stock Market ETF
20% VMSXX Vanguard Municipal Money Market Fund
(contribute to the settlement fund VMSXX every 2 weeks out of paycheck and rebalance accordingly)
My ROTH IRA has been using this allocation:
30% Vanguard Total US Stock Market ETF VTI
30% Vanguard Total International Stock Market Fund VTIAX
10% Vanguard REIT Index Fund VGSLX
30% Vanguard Total Bond Market Fund VBTLX
(rebalanced manually annually)
403b/457:
Fidelity U.S. Bond Index Fund Fixed Income – Intermediate Core Bond 15%
Fidelity 500 Index Fund Large Cap – Blend 35%
Fidelity Extended Market Index Fund Mid Cap – Growth 25%
Fidelity Total International Index Fund International – Large Blend 25%
(automatically rebalanced biweekly from paychecks)
Our HSA:
100% VTI
(automatically purchases shares every 2 weeks from paychecks)
Have 529 accounts in target date funds.
Questions:
1) Sounds like to be safe from wash rule I need to have something different in the HSA (not VTI) so that when I tax loss harvest from VTI to iTOT and VXUS to IXUS in my taxable account, the automatic purchases of VTI in the HSA don’t trigger a wash?
2) If I turn off autoreinvest in my Roth IRA I can leave the allocation as it is (assuming I just pay attention to when I last TLH in my taxable account before buying more of the same shares and don’t do it within 31 days).
3) Finally, just to clarify you would interpret the mutual fund version and the ETF version of funds as substantially identical (e.g. VTI and VTSAX), so I’d have to watch for that as well. I initially started with some ETFs and some mutual funds from expense ratios but wondering if I should just pick one type and stick with it to simplify.
Thanks so much for all you do!
Incidentally, this is what chatGPT told me to the question (but would value some human input)
TLH Wash Sale Summary
Taxable:
Tax loss harvest VTI ↔ ITOT, VXUS ↔ IXUS
HSA:
Replace VTI with ITOT or SCHB to avoid wash sale from automatic purchases
Roth IRA:
Turn off auto-reinvestment; avoid new VTI/VTIAX purchases within 30 days before or after TLH activity in taxable account
403b/457:
No action needed — holdings are in Fidelity funds, no overlap with TLH targets
529s:
No action needed — not relevant for wash sale rules
I’ve never heard that HSA matters either. The rules I’ve seen only say IRAs count.
1. HSA doesn’t count. So ignore that.
2. Why aren’t you looking at all of your retirement money (403b, 457, Roth IRA, and taxable +/- HSA) as one big portfolio instead of separate asset allocations?
3. Yes, two shares classes of the same fund are pretty clearly substantially identical. I think ETFs are best to use in taxable and elsewhere I use whatever is easiest/cheapest.
re #2: my plan is to transition my retirement money to “one big portfolio.” Initially I had my Roth IRA at Vanguard and the above was my allocation (along with a small 403b from residency in a target date fund). Now with my new job past 2 years my 457/403b is through Empower and the best options they had were those Fidelity funds. I started my taxable account at Vanguard this past year after paying off all loans, and have been slowly building it in the above noted allocation. Overall (for better or worse) it was easier for me to be thinking of balancing each separate account individually. But I’ve been reading your other pages including: https://www.whitecoatinvestor.com/asset-allocation-rules/
and it will be one of my investment tasks for this year to clean it up. Thank you again!
Our pleasure. It can be simpler for sure, but it does make it hard to do anything asset location wise.
https://www.whitecoatinvestor.com/asset-location/