By Dr. James M. Dahle, WCI Founder
One benefit of a market trending down is that an investor can get Uncle Sam to share in their losses by tax-loss harvesting. Up to $3,000 a year ($1,500 married filing separately) in net investment losses can be deducted from your regular income. In a typical physician tax bracket, that's worth about $1,000 in cold hard cash. If you have more losses than $3,000, the loss can be carried over and applied to your future tax bills.
For many people, it is hard to sell a losing investment. You have to admit you didn't have the ability to tell the future. Once you admit that your crystal ball is always cloudy, you realize that the intelligent investor can take advantage of the downturn.
What Is Tax-Loss Harvesting?
You are allowed to deduct up to $3,000 per year of a short- or long-term capital loss from your ordinary income on your taxes. Losses also offset gains. This all takes place on Schedule D of IRS Form 1040. These losses are so useful that investment advisors, tax preparers, and financial gurus the world over recommend you book them any time you can. However, taxable losses generally show up after an investment goes down in value, not exactly the time you would normally sell an investment. Buying high and selling low is a losing proposition most of the time.
Thus, the birth of tax-loss harvesting.
When tax-loss harvesting, you get to claim the loss without ever selling low. You do so by simply exchanging one investment for a very similar (but, in the words of the IRS, “not substantially identical”) investment. You're still fully invested (and so haven't “sold low”) but still get to use the loss on your taxes.
How to Tax-Loss Harvest
I wrote about this in 2018 when describing how to tax-loss harvest through my Vanguard account. But here's a good rundown of how to think about it.
#1 Buy and Hold Investments You Want to Hold for a Long Time
If you're not jumping around in the market, market-timing, and speculating, then you've bought investments that you want to hold even if they go down temporarily.
#2 Harvest Losses in a Decline
When they decline in value, instead of panicking and just selling them completely, you “harvest the losses.”
#3 Trade for Something Similar
You get the tax benefits just for selling the losing investment. But if you don't trade it for something similar, you commit the cardinal investment sin of buying high and selling low. The wise investor SWAPS the losing investment for one that is highly correlated with it. The net effect is that your portfolio doesn't change substantially, yet you still get to claim the losses on your taxes. As an example: A typical exchange might be to swap the Vanguard Total Stock Market Fund for the Vanguard 500 Index Fund. These two funds have a correlation of 0.99, but nobody in their right mind could argue they are substantially identical. The first holds thousands of more stocks than the second, they have different CUSIP numbers, and they follow different indices.
Tax-Loss Harvesting Rules
There are a few important tax-loss harvesting rules.
Substantially Identical Rule
This means you could swap a Vanguard Total Stock Market Fund for a Vanguard 500 Index Fund, but you couldn't swap a Vanguard Total Stock Market Fund for a Vanguard Total Stock Market ETF. Those are substantially identical. Now, some people think the IRS really dives into the details of these transactions, but I don't know anybody who knows anybody who has ever been audited on this point. The IRS has bigger fish to fry. So, I really wouldn't spend any time worrying about it. Certainly, in this case, one fund holds thousands more stocks than the other, so it is an easy argument to make that they are not identical. You can also argue that two indices and the holdings themselves are different even if you're using a Total Stock Market fund from two different companies.
Wash Sale Rule
The easiest rule to screw up tax-loss harvesting is the wash sale rule. That means you can't turn around and buy the same security in the 30 days after you sell it—if you do, the basis is reset and that loss you were trying to get is washed away. You also can't buy it in the 30 days BEFORE you sell, UNLESS you also sell the shares you just bought. You also can't buy the same security in an IRA that you just sold in taxable. The tax code doesn't say you can't buy it in a 401(k), but I think that is at least against the spirit of the rules.
Be careful buying and selling frequently, of course. If you don't hold a security for at least 60 days around the dividend date, you will turn that dividend from a qualified dividend into a non-qualified dividend, eliminating a lot of the benefit of that tax loss.
60 Day Dividend Rule
Don't forget that owning a security for less than 60 days around (including before or after) a dividend date turns a dividend that would have otherwise been qualified into an unqualified dividend. You pay a much lower tax rate on qualified dividends than non-qualified dividends. So if you start frenetically tax loss harvesting, you could end up paying MORE in taxes. Slow it down, especially around dividend dates.
When to Do Tax-Loss Harvesting
In June 2018, there was a period of time where stocks dropped for about six days straight. There were similar episodes, at least for international stocks, in February, March, and May of that year, as well. If you had purchased an international stock index fund at any point during 2018, chances were very good by June 19 that you had a loss you could tax-loss harvest, especially if you had not already done it for that year. (Obviously the really astute probably already did this in February, March, or May.)
That's one example of when it would have been a good time to tax-loss harvest.
Remember, though, you're likely having to pay administrative costs whenever you're exchanging funds. You need to make sure that your tax gains will be higher than the costs you're having to pay.
An Example of Tax-Loss Harvesting
The Stock Purchase
On March 14, you bought $5,000 worth of Vanguard Total Stock Market Index Fund (TSM) at a price of $32.64 a share and $5,000 worth of Vanguard Total International Stock Market Index Fund at a price of $15.67 a share.
The Exchange
On Friday, August 5, you exchanged the TSM for Vanguard Large Cap Index Fund, selling the shares of TSM at $29.99 a share and exchanged the TISM for Vanguard FTSE Ex-US Index Fund, selling the shares of TISM at $14.66 a share.
The new funds have a correlation with the old funds of something close to 0.99. It's essentially identical for investment purposes. But per the IRS, the investments are not “substantially identical” for tax purposes.
Booked Loss
You have now booked a total loss of $728.22. Given a 32% federal tax bracket and a 5% state tax bracket, you've now saved yourself $728.22 × (0.32+0.05) = $269.44 in taxes. The best part is that if the market trends down, you can do it again tomorrow. You just have to remember not to go back to TSM and TISM for at least a month, or the “wash sale” rule eliminates your tax break.
The Critics
Some critics point out that you'll end up paying later the tax you save now because you've lowered your tax basis on the investment. That is true, but there are several reasons why it is still a good idea.
- First, there's a tax arbitrage here. You get to deduct taxes at your regular income tax rate, 37% in the example, but only have to pay at the capital gains tax rate later, say 15%.
- Next, there is a benefit to deferring the taxes as long as possible. Money now is worth more than money later—due to inflation and also due to the time value of money.
- Last, it's possible you'll NEVER have to pay taxes. If you later use the shares for a charitable donation (in which case neither you nor the charity pays the tax) or if you die and leave them to heirs (in which case there is a step up in basis to the value of the investment on the date of your death), then you'll never have to pay that tax.
Remember that you can only tax-loss harvest in a taxable account.
But if you do have a taxable account, the next time there is a downturn in the market, see if there is some tax-loss harvesting you can do. It won't necessarily allow you to FIRE tomorrow, but it could provide some nice tax savings.
What do you think? Do you tax-loss harvest investment losses? Why or why not? Comment below!
[This updated post was originally published in 2019.]
Have your thoughts changed any on what constitutes a wash sale? In my review of the robo-advisors, who offer tax loss harvesting built in, there is an interesting avoidance of ETFs that follow the same index for fear that will violate the spirit of the “substantially identical” wash rule. For instance, Wealthfront trades between Vanguard’s VTI and Schwab’s SCHB because the former follows the CRSP US total market index while the latter follows the DB Broad US market index. Other documents I have read suggest correlation should be 95% or less between holdings. Other arguments seem to follow a slippery slope, probably because the word “substantially” is so vague. Since you blatantly stated your opinion on the backdoor Roth, I figured you would have an opinion on this, as well. Does this one follow the same suit?
Yea, it does. The IRS doesn’t care. I doubt they’d even notice if you swapped a Vanguard admiral share mutual fund for its ETF. I wouldn’t go that far personally, but I certainly wouldn’t lose any sleep swapping an S&P 500 fund for a TSM. The Bogleheads have a standing offer for anyone for whom the IRS has actually made a stink about a wash sale that wasn’t an exact swap and no one has come forward in years.
This just isn’t a big issue on the IRS radar. Here’s Mike Piper on it:http://www.obliviousinvestor.com/tax-loss-harvesting/
I generally agree with Mike on this one. Just not a big enough deal that it’s worth arguing about.
Great post. Sadly I have avoided tax last harvesting for years because it was confusing, but I’m ready now. ***Quick question: can you tax loss harvest securities or mutual funds held less than one year? I know with donor advised giving you lose the advantage if it’s a short term game so wanted to double check. Many thanks!
Yes.
When harvesting a fund/stock where you’ve purchased at a variety of prices over the year, are you only to selloff/harvest the # of shares that were purchased above the current price? For instance, I currently have around 50K of an investment that I purchased at lets say $50, $75, and $100 throughout the year and it’s currently valued at $65. Vanguard gives me a summary loss on the year for that investment at around $1000. Do I sell all of my current shares or do I only sell the # of funds bought at the higher prices?
With specific share identification you can sell just the shares purchased for more than $65 a share.
My specific share identification will be via FIFO for older shared purchased at $100. But I did got some shares very cheaply at $50 in last 30 days near bottom. You just answered my last question about your second approach that I have to sale all (some at $100 and some at $50) for tax loss harvesting and buy similar sector funds (more than 30 days OK?). Please clarify. I hope I can just use FIFO to get rid of only those older shared I got at $100 per share for tax loss. May be wait 30 days after the time I got my $50 shares during crash so I can keep those “good-deals” till next bull market? Thanks.
Curious about this. What if you are in a dividend bearing fund that pays out at regularly at set intervals and/or have bought at various price points over time. Are you able to designate which shares you want to sell to tax loss harvest specifically? FIFO or LIFO may not be the most advantageous and I would prefer to click on a particular set of shares bought at a certain price. Thank you!
MK
Yes.You can name specific tax lots/shares to sell. Every brokerage will let you do that instead of FIFO or LIFO.
Thank you.
Now that’ve i’ve submitted i’m realizing the math very like works out that the # of shares that I sell above current asking will come to the total losses. Silly question; sorry :P.
Good morning,
Would love to hear your feedback on my scenario. I am 30 and bought into a few mutual funds a few years ago. They were up around 8% for the past year and a half, and now a few are down 20% for 2016, which is about 15k. I am not real familiar with tax harvesting (we are high tax bracket). After reading your article, do you think it would be a good idea to sell the two mutual funds that are down 20%, and then buy back in on them after 31 days? These funds are all long term funds (30 years). Look forward to hearing your thoughts.
Thanks,
Jason
What did you buy that’s down 20%? I’ve got lots of funds, but none have lost 20%. Maybe a China ETF or commodity fund?
At any rate, what I usually recommend is you find a fund not substantially identical, but with very high correlation, and exchange into it. Then you can claim the loss and your portfolio really hasn’t changed-i.e. you haven’t sold low. If you wait 30 days, the market may go up substantially.
Bitoech buy with fidelity and a large cap. I had extra funds and bought in way too high.
Ouch on both!
Any idea what would be a very high correlation with these two funds? I really feel like the biotech will come back in the next ten years
If you want to bet on biotech, perhaps IBB or XBI:
http://www.fool.com/investing/general/2015/11/01/the-top-3-biotech-etfs-on-the-market.aspx
I just TLHed for the first time. Thanks for your valuable info as always. Question.
I bought some VTIAX in August (and 2 other times in 2018) and TLHed into VFWAX in October, so >30 days. But what if I had bought VTIAX <30 days prior to TLH? Would that have resulted in a wash sale? I am not at the point now where I buy more in my Taxable Brokerage account every 2 weeks or every month, but I feel like I will be there soon as my income grows. Once I start buying every 2 weeks, how can you ever TLH? I pretty much just have a 3 fund portfolio and buy more of the same in Taxable Brokerage account when I have extra cash (beyond maxing all retirement options). Or am I misunderstanding the 30 days rule, both forwards and backwards. It is easy to not buy for 30 days after a TLH. But controlling what you did 30 days prior to a stock market drop is not possible. Thanks for any clarification.
Not as long as you sold the shares you just bought as well (which you usually do when tax loss harvesting.)
Ah. So a purchase 30 days prior to TLHing is fine as long as those lots are TLHed too. Don’t hold on to what you just bought, which you wouldn’t.
I guess the lesson is look for an opportunity to TLH every month prior to new purchases. If your stuff is down, TLH it and buy more of the “highly correlated” fund you just TLHed into, not the one you had been buying.
Thanks WCI!
Really you just need to compare basis to value when the market is down. At Vanguard, it’s really easy when you click on the cost basis tab and look at the unrealized gains/losses. Just look for red. In fact, I’ll be tax loss harvesting again today.
I like growth fund ETF’s in my taxable account, given that do not generate much in dividends. Looking at Vanguard’s large-cap growth (VUG), mid-cap growth (VOT), and small-cap growth (VBK), would it be reasonable to harvest one for another over time? Granted these are not similar funds (essentially no similarity in investments given different market caps), but generally trend in the same direction on any given day. Or do you feel they are so dissimilar as to screw up an overall portfolio balance (however the taxable account pales in comparison to the amounts in tax-protected accounts)? Thank you!
I agree they’re not particularly similar funds. Personally, if I were tax loss harvesting VUG (large growth), I’d just go to VTI (total stock market) or 500 index. I think the correlation there is higher than for VBK (small growth) isn’t it?
Indeed, you’re right, the correlation should be higher as it shares many of the same companies in the internal portfolios of large-cap growth, total market, and S&P 500. However, if you end up keeping these in your taxable portfolio long term, you are putting more value stocks (read dividend paying stocks) into that portfolio. Maybe that concern is overblown, I don’t know how much difference that will ultimately make.
It’s true you shouldn’t exchange into something you’re not willing to # 1 keep long term or # 2 donate to charity. Your other option is to wait 30 days, hope the market doesn’t go up, and buy the same thing. If it REALLY bothers you to go from large growth to large blend, then buy a fidelity or schwab large growth ETF.
Regarding these harvesting procedures, here’s another issue I’ve come across from IRS:
“Rev. Rul. 2008-5 Rev. Rul. 2008-5
Loss from wash sales of stock or securities. This ruling provides that if an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to purchase substantially identical stock or securities within a specified period, the loss on the sale of the stock or securities is disallowed under section 1091 of the Code, and the individual’s basis in the IRA or Roth IRA is not increased by virtue of section 1091(d).”
I’d like to get WCI’s opinion on if there is concern for this being applied to 401K accounts as well (now or in the future). My work 401K account for instance, auto invests in an S&P500 fund biweekly. So if this rule could apply across all tax-deferred accounts, it really complicate things. Also, during significant market swings, I may take the opportunity to rebalance other 401K/Roth IRA portfolios. Furthermore, I’d like get opinion on if rule would apply to including spousal accounts if filing on a joint return (I’m guessing red flags would be raised).
Not sure whether it’s a no-no or not like in an IRA, but it’s a pretty easy problem to avoid. I also think it is VERY unlikely that anyone doing it would be caught.
I have about 8k in dividend earnings this year.
I only have an ETF portfolio so don’t have any capital gains, so there is nothing to offset there.
Can I tax harvest losses to offset the annual dividends?
I’m confused if the 3K max of ordinary income at 39% tax bracket or dividend tax bracket 20%?
no, you can’t tax loss harvest to offset dividends. If your marginal tax rate on ordinary income is 39% then harvesting losses to offset ordinary income should save you 3000 * 39% = $1,170 in tax this year.
So to offset ordinary income do I have to Tax harvest short term capital losses from this years purchases instead of long term capital losses?
to offset ordinary income you need have realized losses in excess of realized gains. short or long term losses doesn’t matter, either will offset income, if there are losses > gains
first priority is like offsets like
long term losses will first offset long term gains, then short term gains, then ordinary income
short term losses will first offset short term gains, then long term gains, then ordinary income
Either are fine.
No. Capital losses only offset capital gains and up to $3K of ordinary income. Dividends and capital gains/losses are in different categories. Sorry. I suppose if the ONLY other taxable income you had was the dividend income then the capital gains could offset up to $3K of it, but who’s in that situation?
I’m sure this question has been answered, but I can’t find the right search terms. If I have, for example, $5k of LTH carryover from 2021 and $2k of capital gains in 2021, can I offset all $2k of the capital gains AND $3k of ordinary income in 2021, or only $2k of gains and $1k of ordinary income? My interpretation is the former, but I can’t find any examples that describe this situation. Thanks!
yes, the former. Unlimited use against capital gains but only $3K per year against ordinary income.
The tax-loss harvest investment losses is an excellent strategy for people who plan to retire many years before 59 and 1/2 and need to build an appropriate taxable account in addition to the tax protected account.
However, your taxable income must be higher than the third tier of the current tax bracket for the tax strategy to have any value!
I refute the assumption that someone retiring before Age 59 1/2 MUST build a taxable account to support them between retirement and age 59 1/2. There are enough exceptions, primarily the SEPP rule, that allow access to money that it is usually a mistake to miss out on tax-protected and asset-protected space in order to build a taxable account.
https://www.whitecoatinvestor.com/how-to-get-to-your-money-before-age-59-12/
Nevertheless, most people who save enough to retire before 59 1/2 have a substantial taxable account just because they couldn’t put it all into tax-protected accounts so it’s really a non-issue for most. Those who can’t retire before 59 1/2 can’t do so because they didn’t save enough, not because they didn’t put it in taxable.
Agreed that tax loss harvesting doesn’t do much good in the 0% LTCG tax brackets! In fact, those folks should be tax gain harvesting.
Long term chronic stress is the deadliest disease in modern day living. It is culprit that unlock all the illnesses – mental and physical.
It brings down marriages and eventually shorten your existence and deny your potential to be…
If you find your self in a longer term chronic stress situation, especially in the financial area of your life, pushing for the fastest and biggest taxable account is the best option. The miniscule in tax saving may not worth the physical disease that manifests itself.
The optimal number for Financial Independence for the higher earner group like yourself here is 3 Millions. Most of you can accumulated this number in less than 10 years if you are willing to live your life like an average person.
I think this is where you and I are differing in the financial ambition!
I have no idea what you are talking about. It doesn’t cost anything to get the tax advantages of a retirement account. You just max them out before you put money in a taxable account. Obviously if you’re trying to hit FI in 10 years you’re probably going to be saving a lot above and beyond what can go into retirement accounts.
I have no idea why or how you think we “differ in financial ambition” but if you think spending a whole decade to put away $3M is somehow MORE financially ambitious than what I’ve been doing the last few years I don’t think you’ve been paying much attention to what’s been going on with this website.
I disagree that “pushing for a big taxable account” is the best response to a job you can’t stand. I think the best response is to change the job or find out you prefer more. Retirement is the back-up plan in case you can’t find meaningful work you want to do the rest of your life.
There are two professions in any collective societies occupied a sacred stature:
1. Medicine – the hands and skill that heal
2. Education – the character and skill that educate
Do you want for your kids and my kids grow up in the world where the vast majority of doctors could not passionately practice medicine for less than 20 hours per week? The same question can be rephrase for educators.
Yes, this site is about financial optimization for doctors. Actually, these financial game plans can be utilize across board to minimize financial stress in the every day living.
I am confident 99% of doctors did not go into medicine to make money (my brother is a doctor). Yet sadly, it is money that eventually determine the level of passion in their practice.
Loading up the front end taxable account will give you the fastest path toward the freedom to practice medicine in accordance to your compassion. You can make decision for your patients without the constraint of money.
Please, please, before you post your next reply, check it for spelling and grammar. Simply copy and paste the content into a U.S. English version of Microsoft Word. While it won’t address financial fallacies such as contributing to a taxable account before maximizing qualified accounts, it will make the resulting word salad somewhat easier for folks to read.
Thanks Hank for the Microsoft Word advice!
My reply to you is written in Word.
I believe my message got through with English as my non-native language – regardless on mutual agreement. That is the beauty in open mind conversation!
You don’t kill the messenger just because you don’t like the message.
Live and learn Hank!
You keep making that assertion after I’ve effectively debunked it. This article might help:
https://www.whitecoatinvestor.com/early-retirees-max-out-retirement-accounts/
What about the studies I’ve often seen demonstrating that people have a miraculous ability to sell on exactly the wrong days?
The result is their overall returns are far less than just sitting on the losses and letting them recover over several years. The annual tax savings of $1,000 wouldn’t come close to making up the difference. It would make more sense to me for buying entirely different investments – not similar ones – because your investment philosophy has changed significantly.
I don’t think you’re getting the point of TLHing. You don’t really sell low, because you’re exchanging stocks for stocks while booking a tax loss.
Entrepreneurship opportunities – I made the mistake of overloading the back end retirement and lost few golden investment opportunities in the past 9 years! I absolutely do not know the tax effective strategy of pulling out 1 mil from a retirement account before 59 and ½.
It is crucial to design the lifestyle that fall in the range from 2% to 4% of all investable assets. But do plan for entrepreneurship opportunity if you are still young and productive!
Financial Independence concept has been around for thousands of years beginning with the early entrepreneurs. Retire Early is nothing more than a marketing gimmick.
It is true that there are some investments that are particularly tricky to put into a tax protected account. Hopefully one can do those in addition to maxing out tax protected accounts, but if one can’t, then one has to choose.
WCI – I always have the soft spot for Doctors and Teachers. You guys are the backbone of the society. I just wrote this article specifically for you (and Hank – if he can accept my less than doctor sophisticated jargon!)
Hopefully, you are willing to make small change in the financial plan to avoid my mistake. Otherwise, we will have to agree to disagree!
http://www.1designerlife.com/2019/11/07/money-fire-is-a-gimmick/
It’s your money and your life. I agree if you want to invest money in something you can’t use a tax-protected account for then it’s good to have a taxable account. I agree if you want a lump sum and 100% of your money is in tax protected accounts that it is hard to get a big lump sum out without penalty before 59 1/2.
I don’t agree that this is a common issue that most docs should plan for. First, because most don’t retire early anyway. Second because those who do generally have a large taxable account anyway because supersaving docs usually can’t get all their savings into tax protected accounts. Third, most people don’t need a lump sum nor investments that can’t go in at least a self-directed IRA.
So I think my general advice/rule of thumb stands- max out your retirement accounts before investing in taxable. If you don’t agree with that, well, it’s your money and your life.
One question I have had about TLH concerns when there is a significant market drop such that one may be selling/exchanging shares purchased >1 year ago. Doesn’t this result in converting dividends taxed at the LTCG rate to dividends taxed at the short term/marginal income tax rate for those shares/that money that is exchanged? It should only take 1 year for those new shares to get back to the LTCG rate of taxation, but if the difference is 15% or 20% or 23.8% for LTCG on those dividends vs 35% or 37% for marginal income tax rate I wonder how much of the benefit will be eaten up? This is one of those calculations I’m not sure how to do and wonder if there is someone who could explain it or make it more intuitive to me.
Hi Jim great article and excited to do my first TLH soon (can’t believe I’m praying for the market to do down, but I have recently started investing in taxable and my wife just started a call position making 200k extra!) I recently saw a youtube video featuring 39.6 expert Victor Mangona who did a tutorial on tax loss harvesting and he recommended that before the market closes you look at your funds corresponding ETF to verify that a loss is occurring. He then recommended putting in the order to sell your mutual fund before the market closes in order to make sure that when the market opens the next day you actually are able to immediately do the sell order and net the loss. I am unclear however if one really needs to put this order before the market closes. Is there any problem tax loss harvesting by just looking at the cost of my index mutual fund after the market closes, see that it’s down, and then put the order to sell? I’d hate to be watching the market while at work in order to do TLH right!
No, you put the order in before the end of day so it occurs at end of day, not the next day. Mutual funds trade/buy/sell at 4 pm Eastern each day. I suspect Victor was recommending you double check that the fund is still down close to 4 pm before putting in your order.
If you wait until the market closes, the order takes place at 4 pm the next day. With ETFs, the order takes place close to immediately during the day.
Honestly, this isn’t required most of the time. If your fund is 5% down from your basis, it probably isn’t going to suddenly recover that in one day. At a certain point, TLHing isn’t so valuable. Once you have $100K in losses, there isn’t a whole lot of benefit to doing much more. You certainly don’t have to catch every single loss possible.
cool thanks 🙂
Thanks for tweeting out this article, very timely given the events of the last 4 days. I have a question about swapping between funds. If one would like to tax harvest a loss in a fund like a S & P 500 index fund, would buying in an S & P 500 ETF be acceptable (different instruments but following the same index)?
Hey man I’m pretty sure the answer is no- it’s tracking the same index so it is “substantially identical.” You would need something that tracks at least a different index. In the case of an S and P 500, you can do just any total stock market index fund, VTSAX or FZROX or FSKAX, as total stock market indexes are like .99 correlated with the S and P 500.
btw VTSAX or FZROX or FSKAX are all total stock market index funds that track different indexes, so likely can TLH out of and into these funds and can make an argument that they are not substantially identifcal.
Thanks, that makes sense.
Certainly not if they’re both Vanguard funds.Really so long as it’s a different CUSIP number it’s probably fine, but why wouldn’t you go from S&P 500 to Total Stock Market?
Thanks for this great review on TLH. One question, is there an easy way to see how different ETFs/mutual funds correlate? I have vanguard and don’t see anything like this but maybe I am missing something.
hey dude try look at morningstar to get info and the style box of your particular fund and one that you might be able to TLH into. you can see how close they are to each other, style box wise as well as number of comapnies, etc. Make sure they do not track same indices as I mentioned above if you do TLH.
I’m not even sure I’d worry about the same index thing as you can track the index with a totally separate set of stocks and thus can argue the investments aren’t identical. But it’s easy enough to go TSM to 500 to Large to Growth index etc. No need to go 500 to 500 and still maintain correlation of 0.99.
cool thanks Jim. yeah I don’t fully agree with Mike Piper’s opinion above as it seems overly stringent. For me I would feel comfortable saying in tax court “they track different indices.” Also you are right I would feel comfortable also citing that the index your tracking is using totally different stocks!
So I am so proud of myself did TLH for the first time yesterday 🙂 went to celebrate the small win by getting Ben and Jerry’s with the family. They had no idea what we were celebrating.
also what are people’s typical trigger with TLH? Mine was $3k, though sort of arbitrary given that the max you can take in a year, so I am anchored to this number. anybody else have a reasonable trigger?
Well the first $3K in losses is obviously the most valuable. But since you may only get to tax loss harvest once every 2 or 3 years, the next $10K or so is pretty valuable too. And you can use losses to offset gains in an unlimited way, so if you expect to do much selling this year it can be pretty valuable too, especially if you’ll be taking ST gains like I did a couple months ago knowing I had the losses to cover them. But at a certain point, it isn’t worth much.
On the other end, it’s hard to get excited about doing a transaction to book a $50 loss.
So the answer is individual. Once you have enough losses, a $10K loss may not even be worth taking. But if you don’t have any at all, a few hundred bucks in losses probably makes it worth it.
You can look at 10 year returns on Morningstar. That’s probably easiest. Dan Wiener has a correlation tool for Vanguard funds on the lower right of this page: https://adviseronline.investorplace.com/
Thanks for this Jim. Is electing to NOT have dividends and capital gains distributions automatically reinvested a crucial component of TLH?
I just changed method to “Specific ID” for all my taxable holdings–
Once you’ve done selling with FIFO or Average Basis are you stuck w that method until the whole position is liquidated?
No, but I think it’s worth doing.
I don’t know whether you can change for sure, but I think you can.
Thanks Jim. I was trying to change the cost basis at my other taxable accounts too and I observe that Fidelity is not nearly as user-friendly vis-a-vis TLH.
https://www.fidelity.com/tax-information/tax-topics/capital-gains-cost-basis
Great article! I’m new at this so please forgive me if I ask a question you already addressed.
I contribute $2000 every month to an after tax investment account that holds index funds. I started this within the last year (for the sake of the example let’s say 5 months ago). So my basis is $10,000.
This account took a hit recently, let’s say for examples sake the entire account is now worth $7000.
Does the entire account have to wait 31 days since my last contribution to do a tax lost harvesting? Could I potentially sell a portion of the $8000 I contributed more than 31 days ago?
The stock market began to fall before my last contribution so I’m not even sure how I would start to find which proportion represents contributions made more than 31 days ago anyways, perhaps it is a moot point.
Thank you for your blog,
Steffie P
This is where it can get a little confusing. If you plan to sell, you definitely want to include the “lots” of shares that you purchased in the past 31 days, along with whatever shares you care to sell (ideally the ones with the highest basis). If you sell positions and book a loss, but had reestablished a position in the past month at a lower basis, this would trigger a wash sale (much akin to selling for a loss and buying the same stock for a lower price). I hope this helps and welcome other comments from the forum.
No. You can sell/exchange the whole thing and book a $3K loss.
Great one.
Regarding comparing ETFs to see if they are “substantially identical,” I use the EFT Research Center’s tool that you can find here: https://www.etfrc.com/funds/overlap.php It’s great. You can both look up an ETF and then go to its “Comps” section or you can type in the tickers of two ETFs and it compare them. The comparison is stated as a weighted percentage. For example, VTI and VOO have an 85% overlap. Whether that’s too much is your call. But I would be comfortable with it. The fund overlap tool also compares expense ratios of all the comp ETFs so you can see which of your partner candidates is cheaper. There is a free version or you can pay $29 a month. The difference is that you only get 20 comps with the free version. They may all be 95% or more, in which case you will have to look elsewhere for a replacement ETF.
I think you’re way overthinking this. Can you point to a single tax court case where they used this method? I can’t. Basically, different CUSIP, different security according to your brokerage. And if they don’t care, the IRS doesn’t seem to. I have yet to hear of anyone audited on this point.
My specific share identification will be via FIFO for older shared purchased at $100. But I did got some shares very cheaply at $50 in last 30 days near bottom. You just answered my last question about your second approach that I have to sale all (some at $100 and some at $50) for tax loss harvesting and buy similar sector funds (more than 30 days OK?). Please clarify. I hope I can just use FIFO to get rid of only those older shared I got at $100 per share for tax loss. May be wait 30 days after the time I got my $50 shares during crash so I can keep those “good-deals” till next bull market? Thanks.
If you sell the shares older than 30 days, but hold the shares purchased within the past 30 days, it will be a wash sale, because you’ve established a new position at a lower cost.
You can’t have bought any shares within 30 days and take a loss unless you sell all of the ones bought within the last 30 days. I’m not sure how much more clear I can be. If you want to TLH, either sell all the shares or wait until it has been more than 30 days since you bought the shares at $50 that you don’t want to sell.
Are Vanguard Ca Intermediate Muni bond fund and Ca Long Muni bond fund substantially different enough to be exempted from the Wash Sale rule?
Thanks
dds
Yes, clearly different.
WCI,
Do you have any thoughts on TLH in light of current tax proposals to increase LTCG rates.
It seems to me that typically TLH turns LTCG into STCL and leaves you with a bigger LTCG later – if your investment recovers.
Dave
Yes, that could happen to you. But remember that I flush capital gains out of my account routinely with charitable deductions and under current law, those lowest basis assets will have their basis reset at my death. Most are unlikely to liquidate their entire portfolio during their lifetime. You also get the benefit of using that money between the TLHing date and the date of liquidation.
[…] sure how to tax-loss harvest? Check out this great article from the White Coat […]
WCI, Thanks for the article. How do you position your investment between different accounts to be able to TLH? For example I have VTSAX ad VTIAX in 401k account that get contributions every two weeks. So that effectively stops me from being able to TLH those two funds in a taxable account unless I am selling them in the tax protected account as well? So how do you make sure you have a diversified investments across accounts and still be able to TLH?
First, the IRS has never said buying in a 401k causes a wash sale. It might be implied by the fact that IRA purchases can cause wash sales.
Second, why are you buying the same thing in a 401k every 2 weeks that you are buying in taxable? Are you trying to keep the exact same AA in both your taxable and tax protected accounts? For example, I don’t have any TSM or TISM in my 401ks at all. It’s all in taxable.
Thanks for the quick reply. I currently have only VOO in one taxable account at VG and some individual stocks in another (been there for years), but I want to add assets to VG Taxable that allows diversification as well as TLH if opportunity arises and wanted to make sure they don’t trigger wash sale if I do. What are some common 3-5 fund TLH partners?
What is the reason for not having TSM and TISM in 401k? I have them in 401k, Roth and kids 529’s. Looks like I have the same 3-5 funds in all accounts outside of my old taxable account.
Thanks.
What’s your overall asset allocation and %s in each account? You just have to lay it all out in a spreadsheet and work it out.
Most people start with TSM and TISM in taxable. So good TLHing partners for TSM are the various TSM ETFs like VTOT and VTI and on the fund side, TSM, 500 index, large cap index etc.
Vanguard basically has two TISM funds, then you can go to a combo of developed/emerging markets index etc. Or go to the various Schwab, iShares ETFs etc.
[…] a good thing when you hold it in a taxable account. Large price swings give you the opportunity to tax loss harvest […]
I assume one has to avoid TLH funds in one’s brokerage account that are also in one’s HSA (apropos of the reply above regarding identical funds in IRA / Roth IRA)?