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- January 24, 2022
Whenever the stock market loses at least 10% of its value, as it does most years, those of us with taxable brokerage accounts have an opportunity to lower our tax bills.
Tax loss harvesting is a simple maneuver. You’re selling one asset and buying another. However, it’s often misunderstood and not done in an ideal manner. The tax loss harvesting tips that follow should answer some of your questions and help you make these transactions confidently.
I’ve harvested something close to $300,000 in losses over the past six or seven years. February and March of 2020 were particularly fruitful At this point, If I realized no capital gains, I could use my accumulated paper losses to offset $3,000 of earned, ordinary income for the rest of my life and then some.
However, sometimes I realize capital gains, like when I sold some lakefront property in 2020, taking a high five-figure gain that will take away a chunk of my carried-over losses.
I also had a microbrewery investment go full-circle in 2020, and I realized more capital gains there. We also sold our $90,000 house for a significant gain of over $50,000 in 2021. In all of these cases where capital gains are realized, my prior losses from TLH efforts will ensure that I don’t owe any taxes on the newly realized gains.
You never know when it might be helpful to have some pocketed losses, so I’m always on the lookout for another TLH opportunity.
I’d like to dispel some myths and offer some tips to make tax loss harvesting (TLH) easier and more effective. If you’re new to the concept, I consider the following posts, particular the Vanguard guide, to be prerequisites.
Please read these first as they’re actually chock full of tips, also, along with screenshots that show you exactly what to do.
- Tax Loss Harvesting with Vanguard: A Step by Step Guide
- Tax Loss Harvesting with Fidelity: A Step by Step Guide
Briefly, tax loss harvesting is a way to book losses without being out of the market for any significant time and without a substantial change to your asset allocation.
You do this by selling one asset, say a total stock market fund like VTSAX / VTI and simultaneously or shortly thereafter purchasing one that would be expected to perform similarly.
In this case, an S&P 500 fund like VFIAX / VOO could work. No, it doesn’t have the extended market (mid-caps and small caps) that the total market fund does, but its performance is going to be very similar. The correlation between the two funds’ return is 99%.
TLH is a quick and easy way to save $1,000 or more on your annual tax bill and potentially save a whole lot more if you can offset large realized capital gains in the future. The following are my top five tips and clarifications, along with some bonus tips at the end.
#1 Take a big enough loss.
I generally like to see a four-figure loss before pulling the TLH trigger. You’ll notice that in my Vanguard example, I took a loss for under $1,000. Why? Mainly because I wanted to put together the post and I took the first opportunity that came along to demonstrate a loss.
It does take a bit of time and energy to TLH, and it means buying something that you didn’t initially own. It makes having a true three fund portfolio extremely difficult. I wouldn’t bother with tax loss harvesting to take a loss of dozens or a few hundred dollars.
However, any time you can take a loss of at least $1,000, I say go for it. That’s a 10% loss on a $10,000 investment or a 2% loss on a $50,000 investment.
#2 Buy something you’d be comfortable owning forever.
Here’s a dilemma I’ve heard from investors who successfully tax loss harvested but then felt stuck. They had exchanged into a fund they weren’t comfortable keeping.
Don’t do that.
What can happen and frequently does happen is a swift rebound in the stock market after you’ve made an exchange. If the market is up a month later, you can’t trade back to your original holding (the asset you sold) without realizing some capital gains and at least partially canceling out the paper losses you previously booked.
My advice is to never purchase something you wouldn’t be comfortable owning indefinitely.
An exception can be made for generous souls who donate appreciated assets to charity. That’s one way to part with an asset you might consider to be suboptimal in your portfolio.
#3 You CAN sell something you just bought.
This isn’t so much a tip as it is a clarification of the wash sale rules. A wash sale occurs when you purchase or have purchased a “substantially identical” asset to the one you sold for a loss in the 30 days before and after the sale (or the day of the sale).
That’s a 61-day window in which you cannot have purchased “replacement shares” for the ones you sold.
So, if you purchased some VTSAX less than 30 days ago, can you sell it now and claim a loss? Yes, you can, as long as you sell all VTSAX purchased in the prior 30 days at the same time. If you’re making weekly or biweekly purchases as some people like to do, you can sell each lot at a loss.
If you have multiple newly-purchased lots and some of them have gains while the other have losses, you still have to sell all lots purchased in the last 30 days to avoid a wash sale.
A wash sale isn’t the end of the world, though. Here’s what happens, as illustrated on the Bogleheads wiki:
“For example, you bought 100 shares of a mutual fund at $40. On March 1, you sold 100 shares at $30. On March 10, you bought 100 shares at $35. Your sale on March 1 was a wash sale, so you could not deduct the $1,000 loss at the time, but your basis in the March 10 shares is $4,500, not $3,500, so you will reduce your capital gains or increase your losses when you sell those shares.”
Also, most wash sales are only partial wash sales. This can happen if you automatically reinvest dividends or have automated investments into a retirement account.
If you sold 100 shares at a loss and bought 10 shares within 30 days, you can take the loss on 90 shares and the cost basis of the 10 newly purchased shares would be adjusted.
#4 You are NOT locking in a loss.
Again, this is more of a clarification. Any time TLH is brought up in a public forum like a personal finance Facebook Group, someone (usually a few people) will chime in that they’re buy-and-hold investors or that one should never sell low.
I don’t consider tax loss harvesting to be violating either of those principles.
I buy and hold an asset class. If I happen to bounce back and forth between Vanguard’s Total International Stock Index Fund (VTIAX) and their All-World ex-US Fund (VFWAX) with an instantaneous exchange at the end of the trading day, I remain fully invested. I’m just invested in a slightly different but not substantially identical fund in the same asset class.
You’re definitely not locking in an actual loss unless you only sell and choose not to buy a similar asset. If you do, that’s not really tax loss harvesting. That’s just a losing investment strategy, although it’s better to sell for something than for nothing by waiting until the stock is worthless before bailing out.
Index funds, unlike individual stocks, however, are not really at risk of going to zero. If they actually do become worthless, I imagine we’ll have larger worries than our investment account balances. Like how much canned food we have in the bunker. Or how to defeat the alien invaders.
#5 Consider a series of tax loss harvesting partners.
Tax loss harvesting can feel a bit like market timing, and in some ways, it is. You’re hoping to sell when the market has hit rock bottom.
I got lucky selling at the post-Brexit vote trough and again on Christmas Eve in 2018, but the timing on those trades was pure luck.
Sometimes, you’ll harvest some losses only to watch the market drop further. Now you have a newly-purchased fund with a loss but you can’t trade back into the fund you just sold for 30 days.
This is where a third fund, and maybe a fourth or additional funds can be helpful.
When we talk about tax loss trading partners, we’re talking about funds that are similar but not identical. There are gray areas here, as the IRS has not given guidance as to what exactly constitutes a “substantially identical” fund. All you will find online are opinions. They may be expert opinions, but they’re still just someone’s best educated guess.
Personally, I would avoid trading two funds that are different share classes of the same fund (VTSAX to VTSMX) or the ETF to mutual fund with identical holdings (VTSAX to VTI). I also wouldn’t try tax loss harvesting from one fund to another that tracks the exact same index, like the S&P 500.
There are people who disagree, and that’s fine. If a gray area is easy enough to avoid, I try to avoid it.
Back to using a series of tax loss trading partners.
Say you sold VTSAX (total stock market) and bought the S&P 500 fund. Now that fund has a loss. You could trade it for a third fund. The Large Cap fund, VLCAX, could do the trick.
What if that fund has losses and 30 days isn’t up?
You could choose another large cap fund like Large Cap Growth or Large Cap Value. Don’t forget about rule #2, though — only buy what you’d be willing to hold indefinitely, and our holdings are getting more different from the original fund, especially with the value fund, and the expense ratio has also risen.
A better alternative might be buying a fund from a different brokerage. Both Schwab and Fidelity have total stock market funds that follow a different index than VTSAX.
- VTSAX tracks the CRSP US Total Stock Market Index
- SWTSX (Schwab) tracks the Dow Jones US Total Stock Market Index
- FSKAX (Fidelity) also tracks the Dow Jones US Total Stock Market Index
- FZROX (Fidelity Zero Fee) tracks a proprietary index used only by Fidelity
Those are a few options and you can always use the ETF versions of funds when they exist. But again, I personally would not trade from one mutual fund to its corresponding ETF or vice versa and expect to book those losses.
I’ve also played this game with the international funds in my taxable account. Several years ago, I jumped from All-World ex-US to Total International to Developed Markets + Emerging Markets and swapped Developed Markets for the European and Pacific Stock Index funds.
That last trade probably violated my 2nd tip about only buying what you intend to keep, but the market dropped some more eventually, and I was able to get back to my original position in the Ex US fund with one last TLH exchange.
Bonus Tips
Avoid owning the same asset classes in your IRA as you have in your taxable brokerage account. This way, automated reinvestment of dividends can never create a wash sale. I have a REIT fund, a mid-cap fund, and a small-cap fund in my Roth IRA.
Turn off automatic dividend reinvestment in your taxable brokerage account. Reinvest manually, instead. Most funds pay dividends quarterly; I only have to do this four times a year.
Set your cost basis to show the basis of individual lots. If possible, do this after you buy, rather than when you’re ready to sell. Vanguard calls this “Specific ID.” With Fidelity, it’s “Specific Shares.”
Understand that your spouse’s accounts can create wash sales. Some couples keep much of their finances separate, but for the purpose of tax loss harvesting, you should have some idea of what he or she has in a brokerage account or IRA. Wash sales can result from purchases in those accounts. The same is true of purchases in an investment account of a business you own.
Know that there’s a 60-day qualified dividend rule as The White Coat Investor points out. If you hold a fund for less than 60 days and it pays a dividend during that time, it will be an ordinary, non-qualified dividend taxed at ordinary income rates. The consequence is probably trivial unless you take a very small percentage loss on a very large sum of money, but it’s worth mentioning.
Let someone else do it. If you’d like the benefit but are overwhelmed by the practical application of it, a roboadvisor like Betterment will use an algorithm to automate the process and do it for you. Their total investment management fees run about 0.25% per year, which could negate the benefit of tax loss harvesting for high net worth individuals.
What about 401(k)s? 403(b)s? 457(b)s? HSAs???
I don’t know. No one does.
The fact that no one seems to know for sure would indicate that no one is aware of the IRS calling someone out on a wash sale resulting for a purchase in any of these accounts.
It’s also worth pointing out that unless your taxable brokerage account most likely doesn’t see what happens in these other accounts. It would be on you to report any such wash sale.
Here’s what the Bogleheads have to say about the issue:
“The IRS has not specifically ruled that other tax sheltered accounts, such as401(k)or403(b)accounts, are exempt from wash sale rules.”
Mike Piper, the Oblivious Investor, says this in his post on the topic.
“Section 1091of the Internal Revenue Code is the law that creates the wash sale rule. It doesn’t mention retirement accounts at all. The rule about wash sales being triggered from purchases in an IRA comes fromIRS Revenue Ruling 2008-5. If you read through the ruling, you’ll see that it speaks specifically to IRAs and does not mention 401(k) or other employer-sponsored retirement plans.
To the best of my knowledge, there is no official IRS ruling that speaks specifically to wash sales being created by a transaction in a 401(k).In other words, I’m not aware of any source of legal authority that clearly says that a purchase in a 401(k) would trigger a wash sale.
However, in my opinion, it seems pretty clear that the line ofreasoningin the above-linked revenue ruling would apply to employer-sponsored retirement plans as well as IRAs.
So, personally, I would not be comfortable taking a position on a tax return that’s based on the assumption that purchases in a 401(k) cannot trigger a wash sale. But that’s just my personal opinion. Others may disagree.”
If you read the whole post, he also says he would not be comfortable defending two different total stock market funds from different companies that track different indices as anything other than substantially identical. In other words, he would not tax loss harvest from VTSAX to SWTSX to FZROX. It’s another gray area, but one I’d personally be more comfortable with.
Regarding the HSA, again there is no clear guidance, but not many people would insist you could create a wash sale with a purchase there. But if you want to be exceedingly careful, it is another potentially gray area that can be avoided. I simply own a total bond fund in mine.
I hope these tips give you the power to tax loss harvest on your own. If you have questions about the actual process of buying and selling, it will look different on every platform, but these two guides may be helpful:
- Tax Loss Harvesting with Vanguard: A Step by Step Guide
- Tax Loss Harvesting with Fidelity: A Step by Step Guide
The Importance of a Taxable Account for Early Retirees
AcreTrader Review: My Investment in Cash-Flowing Farmland
My 5 Current and 3 Future Passive Income Streams
Do you have additional tax loss harvesting tips or questions? Leave them below!
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68 thoughts on “Top 5 Tax Loss Harvesting Tips”
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Thanks for sharing this information as it pertains to TLH. I have a quick question on TLH, I have looked around on the internet and am yet to find the answer:
1) Can you loss harvest like funds on the same day?
-I.e. If I wanted to sell both FXIAX and VOO to harvest losses, could you execute both trades on the same day and harvest the losses associated with both holdings? They are both held in the same account.
Thanks,
Tyler
Reply
Yes — just don’t repurchase either of them in the next 31 days. You can get into the same fund as a trading partner (total stock market fund / large cap fund, etc…)
Cheers!
-PoFReply
PoF,
Thanks! I thought so, but I wanted to run it by a fellow FI’er. Given the market volatility this year, I wanted to offset some of our 2022 tax liabilities and possibly capture enough to carry over into future tax years.
Tyler
See Also5 Most Frequently Asked RVer Tax Questions (and Answers) - XscapersRoth IRAs, 401(k)s and 529s | White Coat InvestorWhat to Do with a Dramatically Lower Income - Podcast #156 | White Coat Investor10 Guaranteed Ways to Save Money for Your Newborn's FutureReply
What about UTMA accounts? If I have a UTMA account for each of my children and I have VTSAX funds in there for them (investing monthly, i.e. set it and forget it), would I have to CHANGE that index fund to ensure that I do not create a wash sale? Or given the accounts are in their name may that not be considered my own account?
Hope that explains my question and concern.
ThanksReply
That’s a great question with no good answer.
You’ll find debates with some highly-informed people arguing both sides here and here.
My gut tells me it’s unlikely to be an issue as it’s not clear you’d be in violation of the rules and it’s unlikely anyone would notice, but if you wanted to take the conservative approach, you might consider exchanging to a different fund in the UTMA account. I’ll let you decide after reading those forum threads.
Cheers!
-PoFReply
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Hello POF, I love your tax loss harvesting series.
I have a question regarding the loss. Once you have claimed 145,00K worth of loss (as mentioned in your prior post), how do you offset your future gains with these losses?
Example: I bought 80,000 worth of VTSAX, now increased to 120,000 in value. How do you offset the 40,000 gain with the prior tax loss harvest of 145,000. Is there a specific form that you have to fill out?
Thank you again for everything!
Reply
Your 1040 calculates capital gains and losses. Any losses not used to offset capital gains (which they will, whether you want them to or not) will be carried forward to future years’ returns where they will first offset realized gains and then be used against up to $3,000 in ordinary income.
Best,
-PoFReply
Hi POF,
Once you tax loss harvest, that loss will stay with your 1040 until you use it? Thanks for the response!
Reply
Hi there. Thanks for this. I’ve read and read and read multiple posts and bogelhead wikis on this and still have a few questions:
1. Do you sell your entire fund or just the amount that equates to how much you’ve lost?
2. When you sell from multiple accounts that hold the same fund is it ok that it doesn’t happen all at the same exact moment? Obv this is impossible, so I’m guessing that as long as you handle all the similar funds in various accts before the end of market day then you should be ok–but I rather be 100% on that.
3. And then, when you keep doing this do you end up with a lot of $1000 funds, constantly looking for something similar but not too similar?
4. And if yes to 3, how does that effect selling these smaller funds during retirement? Would you sell these first or last to let them grow?Reply
1. I only sell the red lots (losers).
2. I haven’t encountered this, but I doubt you’d have an issue there. If you’re dealing with mutual funds and not ETFs, your transactions theoretically are recorded at the same moment — the end of the trading day.
3. I’m not sure I understand. The Vanguard example may be of help. When you TLH, you’re effectively consolidating lots, not adding to them.
4. Your drawdown plan will be an exercise in tax planning. You’ll decide if you want to take more or less capital gains based on your other taxable income sources. I don’t know what you mean by smaller funds, though. You can trade back and forth between two large funds as many times as you want, as long as 31 days goes by before you go back to the other fund.
Best,
-PoFReply
Thanks, PoF!
1. I did look at your Vanguard example, and it seems like you sold 100%…not just the losers. Unless I’m misunderstanding. How do you sell just the losers?
Reply
Look again. I sold all shares in one $10,000 lot but there were numerous other lots above it in the screenshot with no checkmark.
Vanguard makes it easy to sell only the “red” lots with losses, keeping the greens.
Cheers!
-PoF
Thank you so much for this post!
Reply
When you go to turn off automatic dividend reinvestment for Vanguard funds you are also asked about automatic capital gains reinvestment, which is defaulted to be turned. Does the capital gains reinvestment part matter?
Reply
Yes — money is money whether it’s classified as a dividend or capital gain.
If you use it to buy more shares, you run the risk of creating an unintentional wash sale.
Most Vanguard index funds don’t pay capital gains, but actively managed funds will.
Best,.
-PoFReply
I purchased VTI in my Roth and taxable accounts in 5 different lots over the last 3 weeks- 2 lots in Roth , 1 in traditional IRA and 2 in taxable. I noticed that in my 403b, I have a fidelity mid cap (FSMAX) and FXAIX. These get purchased every 2 weeks – last time was 3/13. Is it safe for me to TLH VTI. I plan to sell ALL the lots (taxable and IRA ones) to prevent wash sale. I plan to purchase either VV or VOO. Is it an issue with the FSMAX and FXAIX in my 403b portfolio that was purchased in the last few weeks? Also I didn’t see an option to “exchange” the VTI. Appears that I have to sell it and purchase whatever I want to TLH with. exchange perhaps only refers to mutual funds. Thanks in advance.
Reply
Thanks POF for a very informative post.
Quick question on the adjustment of basis on a wash sale. Does Vanguard adjust the basis for you automatically, or is the “displayed” basis simply the purchase price on which we will then have to calculate and keep track of the adjustment separately ourselves? If it’s the latter, how does this then translate on future transactions where the reported basis (Vanguard to IRS) will differ from what we are reporting on our tax returns? Could this be an audit flag, or at least lead to headaches where we will have to explain this to the IRS at a later date?
Thanks!
Reply
Vanguard should make the adjustment for you.
But now that you know the rules, you shouldn’t have anything to worry about.
Cheers!
-PoFReply
First off thank you for the very informative posts/comments on this topic. I’ve been doing a lot of research here/bogleheads forum/etc. I have a question similar to H earlier today that I was hoping you could confirm my suspicions.
Not thinking about TLH when I started funding my taxable account, I’ve been making weekly purchases of VTSAX at Vanguard for a year. My wife and I also hold VTSAX in our Roth IRA’s, and with the market crashing I took the opportunity to put our 2020 contributions into VTSAX for each account. Because those contributions were in the last 30 days (and because they will trigger a dividend in a few weeks) I should exchange the entire balance of each account (2x Roth IRA/brokerage) into VFIAX or VLCAX right? Doing that in the Roth IRA’s so that they don’t get counted as “replacement shares” bought in the last week and so I don’t get dividends in a few weeks? And doing it in the brokerage to capture the ~$5500 loss I currently see when I go to the gains section? I changed my cost basis election to specific ID, but it looks like that takes a day or two to take effect. Hopefully the market doesn’t rebound too much in that time 🙂
Assuming my plan above is correct, how would you suggest going forward with separating the funds in brokerage vs Roth IRA? Should I hold VFIAX in one, and VLCAX in the other. Then if there is an additional TLH event in the future, I could go back into VTSAX in the brokerage since I’d be holding VFIAX or VLCAX in the Roth accounts? Or is there a better strategy?
Reply
I’ve never done TLH so please bear with me if this is a dumb question. We have fzrox shares in 3 different fidelity accounts (1 taxable, 1 rollover Ira, and 1 Roth).
Questions:
1. I have 12k fzrox in taxable fidelity account that I have bought at different times from yesterday 3/9/20 to last year 2019. Can I TLH shares I bought yesterday as well as over 9+ months ago? What if some of my shares were bought cheaper than the current price? Can I keep some of the sets of shares or do I need to sell all of my fzrox shares? (I’m asking because some of my vanguard total mkt fund was bought dec 2018 so it’s still cheaper than now if I try to TLH my vanguard acct).2. If I can TLH, what is a different but comparable fund I can buy to replace fzrox?
3. Is it ok for me to keep the other fzrox shares in the rollover Ira and Roth accounts?
4. What do I need to be aware of so I don’t make a dumb mistake and do a wash sale?
Reply
1. All signs point to the market being up substantially today, but if the value drops below your cost basis, you can sell them at any time. No need to wait 31 days. You just need to be certain you sell any shares bought in the last 31 days. And you can sell older lots, too. Just don’t sell them if they have gains.
2. FZROX tracks a proprietary index. FKSAX would be a great fund to TLH into.
3. Dividends are coming in a couple of weeks. A dividend reinvestment in your IRA(s) would create a partial wash sale. Not the end of the world, but easily avoided by exchanging for something else.
4. This post was designed to answer that question. Read it thoroughly and don’t fret if you do end up with a wash sale. It just postpones your ability to take a loss, but doesn’t affect the magnitude of your total losses, since your cost basis would be adjusted upwards if you do create a wash sale accidentally.
Cheers!
-PoFReply
Great article! Want to try TLH for the first time if markets keep dropping next week. Thinking of harvesting losses from VTSAX into ITOT. If I have a bunch of VTSAX lots going back years, is it worthwhile to use the losses you are harvesting to “cancel” out some gains on old lots so your realized loss is close to zero? Is there any benefit to this or is it better to just carry the loss forward until you realize gains some time in the future?
Reply
Don’t sell the lots with gains, only those with losses. It’s better to use the losses against ordinary income tax as compared to capital gains that you may or may not ever realize.
Best,
-PoFReply
Thanks for the info! I have done 2 TLH from VTSAX to VFIAX (decided that was better than trying to time a buy with ITOT). With the market dropping like crazy today and guessing more to come the next few days, I think there will be additional opportunities to TLH.
It looks like my purchases in VFIAX will also result in losses, so if I understand correctly, I could turn around and sell those and buy VLCAX to harvest those losses? If I also continue harvesting losses from VTSAX, would you recommend just buying straight into VLCAX also so there are no more purchases in VFIAX?
Finally, I understand your point of view on buying things you want to hold for a long time and think all of those funds are very solid and similar. That said, do folks ever wait the 30 days, sell their new TLH fund (in my theoretical case now VLCAX) and book some capital gains which will be offset by the crazy losses to move back to VTSAX? This is assuming in 30 days after having experienced 20-30% drops, we will not have gone up the corresponding amount.
Reply
POF- the only real downside I am seeing to this strategy is the lower cost basis you are creating; eventually when you go to sell shares you will have higher gains to report than you otherwise would have. How do you factor this into your decision to take advantage of this strategy? Are you thinking the tax saved now is > the potential increase in taxes owed later? Or would the strategy be to donate those shares with lower cost basis later on to charity via donor advised funds; or is it just to pass these lower cost basis shares down to future generations since they will get the step up in basis, tax free? Really just curious for what type of math you are considering here overall.
Reply
You’ve identified a couple of ways to win with tax loss harvesting.
A third is deducting the $3,000 annually at your marginal ordinary income tax rate now (could easily be >40% fed / state / local combined) to pay maybe long-term capital gains rates later. That might be at a rate of 15% (plus state) or 0. Capital Gains taxes can be avoided several other ways.
Cheers!
-PoFReply
Can one TLH from a Vanguard fund to a competitor’s fund through a Vanguard brokerage without additional fees? If not, are you utilizing 2 different accounts to complete the TLH?
Reply
You could do it either way, but Vanguard does offer thousands of ETFs now with no trading fees, including those from other brokerages.
Reply
Is it possible to TLH Vanguard mutual fund to non Vanguard mutual fund in the same trading day? I’ve been trying to figure it out but haven’t been able to. Sell and exchange only seem to give me the option to buy Vanguard funds.
Reply
I suppose you could sell the fund at Vanguard and buy using another brokerage account at a place like Fidelity, Schwab, etc… on the same day. That woy require having another account, though.
One of pre-requisite for tax loss harvesting is to avoid automatically investing into a substantially identical asset, As you mentioned that you accomplish this by investing in small cap, mid cap, and emerging market stock indices in you tax-advantaged accounts, while investing in large cap and total international / developed markets in taxable.
I have mostly large caps in tax-advantaged accounts as there are no better mid/small cap options there. I have large/small/mid cap in my taxable.
I cannot get rid of small/mid cap in my taxable as no better option available in my tax-advantaged account.
I cannot get rid of large cap in my taxable as it will throw out the whole portfolio allocation.How do I do tax loss harvesting in this situation. Do we need to be strict about keep large caps in taxables and small/mid cap in tax-advantage to do TLH?
ThanksReply
Well, one thing that helps is that the only tax-advantaged accounts that we know for a fact can create a wash sale is your IRA (and your spouse’s).
I do now have a Schwab total stock market fund in my solo 401(K), but it follows a different index than VTSAX. So I can trade large cap stocks among a few different Vanguard funds without worry of wash sales in my solo 401(k).
I hope that helps.
Cheers!
-PoFReply
Thank you for writing this.
I missed Friday (not paying attn to market), but saw losses on Monday in my VTSAX so put in my first TLH orders. This was a mistake, as the market went up and some gains ended up cancelling some losses.
Yesterday I harvested again, but I waited until 3:55 to calculate if I thought I would still have a loss.
Is there a better way to do this to avoid making unintended capital gains? Are you looking at the current loss in the corresponding ETF to see if you have a loss in the mutual fund?
Don’t want to mess it up again! Thanks so much for all you do!
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I did my first harvest from mutual fund to ETF yesterday / today and it did not go so well. The ETF opened up > 1% higher than it closed, so I ended up paying quite a bit more than what I sold the mutual fund for at the prior close.
I think the best is to go mutual fund to mutual fund (instantaneous end-of-day trade) or ETF to ETF as long as the money hits the settlement fund immediately.
This was emerging markets and there aren’t exactly a handful of Vanguard emerging markets funds. There’s one. Now I have Schwab’s SCHE, but I paid more than I would have liked to. Of course, it’s the luck of the draw. If futures had been down and the ETF opened below it’s close, I would have come out ahead.
Best,
-PoFReply
If one thinks that markets will continue to go down and I have some international ETFs that I want to get out of, they are currently showing a small capital gain that I’d have to realize when selling.
Is there a rule of thumb that I can use as far as how much a price shoul fall to determining if selling the international ETF and moving it to a bond ETF is worth doing while managing my tax liability?
Example: Own $100,000 in international ETF. Unrealized LT capital gain is $10,000. As the international ETF falls in value, is there a trigger point at which I just bite the bullet and sell and move my $$ into an intermediate bond fund?
MFJ, gross income ~$500,000. I believe our marginal federal rate is 34% and MN state tax is 10% plus the additional ACA tax and we’d pay at capital gains at 20%.
Thanks
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Good question, MW.
You’re also paying the 3.8% NIIT on capital gains for a nearly 34% rate on your long-term capital gains.
It’s a personal choice, and we don’t know where the market is headed. I’m not into market timing, either.
One way to think about it is if the ETF drops another ~ 10%, you’ll owe no capital gains to sell your $100k stake. But that would not be a good outcome.
Better to sell now, pay tax on $10k in gains, and have $6,600 to keep.
Ultimately, what you want is a fixed allocation that you don’t change in respond to news, market conditions, or expectations. Only to life changes (nearing retirement, etc…).
https://www.physicianonfire.com/you-need-an-investor-policy-statement/
I hope that makes sense.
Cheers!
-PoFReply
Love the “I don’t know. No one does.” line about the non-IRA retirement accounts. Spit out some coffee on that one.
Anyways, I appreciate the comments on how you handle the dividends to avoid the wash sale violation. My question…is it possible to automate investments in a vanguard brokerage account in a way that avoids putting yourself in the tricky position of having to sell months and months of investments to avoid violating the pre-30 day component of the wash sale rule. For example, I have invested (automatically) in the TSM index fund every two weeks for the past 3 months….so if I want to TLH then I have to sell every share of the TSM that I have bought in this timeframe…..That may work this time but it’s not going to work in the long term (5 years from now…all those shares…yikes). SO do you only invest quarterly (at the same time of your dividends perhaps) to avoid this issue?
Also, do you only tax lost harvest on short term capital gains losses or would you also do it on long term capital gain losses and does this impact how the capital losses are used to offset capital gains in the same tax year? …like is it a lower percentage (20%) if it is a long term capital loss versus a short term one or is it dollar for dollar offsetting regardless?
thank you for a lovely article and I hope you are enjoying Michigan (I did residency there…now working in Florida…I’m sure you can see the irony there),
Cheers!!
Jason
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The wash sale only goes back 30 days, so at most, you’d be selling 3 lots if you’re selling what you’ve bought in the last month and just bought in the last day or 2.
I’ll harvest whatever losses I have, whether short-term or long-term. The IRS does track which is which, but they effectively function the same. Short-term losses cancel out short-term gains first, and long cancels long, then either can be used against ordinary income (up to $3k per year).
MI to FL — yep, we ended up doing the opposite.
Cheers!
-PoFReply
Let me understand … if you bought VTSAX lots dated – say 2-24-20, 2-4-20 and 1-20-20 … you CAN sell all of those today (March 3) for a loss and it not be considered a wash sale? I asked Vanguard and was told I would have to wait until 3-25-20 to sell in order to avoid a wash sale. They never mentioned anything about selling 100% ot vtsax purchased in last 30 days.
From your post, it appears I could exchange 100% of the 2-24-20 lots and the 2-4-20 lots today with NO wash sale? Is that correct?
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That is correct. I wouldn’t expect a Vanguard customer service rep to be that well-versed on the details of tax loss harvesting, to be honest.
If you only sold the 1-20-20 lot, you’d have a wash sale. Sell them all, and you have no replacement shares to create a wash sale.
There is a chance that the sale would be flagged by Vanguard as a wash sale, but it’s not and the tax calculations should bear that out. This happened to WCI.
Best,
-PoFReply
Timely article, POF, as the stock market took another plunge today.
Thanks again for the tips.
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It’s been an up and down day, but it looks like we’ll be ending the day down again. I might be ready to pull the trigger on some emerging market index fund that now has a slight loss (but well above my $1,000 threshold).
Best,
-PoFReply
This is one of the best articles I’ve read on TLH. Thank you.
Question: to clarify partial TLH, if you buy 100 shares of a stock for a $200/share, and then sell them all after one week at a $100/share, then go back and buy 50 shares of the same stock at $100/share after a week (so all transactions are within 30 days). Do you claim losses on only 50 shares and the cost-basis gets adjusted on the newly purchased 50 shares? That’s my understanding of your partial wash-sale example. Although my prior understanding is that you don’t claim any losses, and all losses of the initially sold 100 shares will go to adjust the cost-bases of the newly purchased 50 shares.
Thanks again for doing the background work to summarize TLH in an easily understandable manner.
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My understanding is that you can take a loss on the 50 shares (you “washed” half of the 100 sold shares). And the 50 shares you just bought will have the disallowed loss added to their cost basis.
So you now have a $5,000 loss to report and own 50 shares with a cost basis of $150 (even though you only paid $100 per share for them).
Here’s the section from IRS Pub 550 that covers this with a slightly more complex example.
“If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.
Example 1.
You bought 100 shares of M stock on September 21, 2017, for $5,000. On December 14, 2017, you bought 50 shares of substantially identical stock for $2,750. On December 21, 2017, you bought 25 shares of substantially identical stock for $1,125. On January 4, 2018, you sold for $4,000 the 100 shares you bought in September.
You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days before the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 14, 2017, is increased by two-thirds (50 ÷ 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 21, 2017, is increased by the rest of the loss to $1,375 ($1,125 + $250).”
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Makes sense, I’ve been researching it as well, your understanding seems to be the correct one. Thank you!
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Can UTMA account purchases create a wash sale similar to your comments above regarding a spouse account?
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With your name on the account, my assumption would be Yes. Once the account is transferred to your grown offspring, it would no longer be an issue.
Best,
-PoFReply
One question about what you said about using these losses to offset capital gains and pay no tax. As I’m sure you know, if you sell your primary residence that you lived in for at least 2 of the last 5 years, the irs let’s you get a $250k gain tax free ($500k for a couple). So these gains wouldn’t be used “against “ what your tax loss harvested, right? You’re only talking about capital gains on a second home?
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Correct.
Any thoughts on what funds to put in the UTMA to avoid a wash? I’d previously had ~50% S&P index and about 22% international, but want to avoid those now.
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Maybe small cap / mid cap funds? That’s what I hold in my Roth IRA to avoid any issues.
Best,
-PoF
I’ve wanted you to write this article for some time; the part about the 30 day before portion of the rule is very difficult to find. A simple reading of all the top google results about the wash sale rule from major financial sites would have one interpret that you cannot sell anything purchased in the prior 30 days without getting a wash.
I think many people do not understand you can. This could lead folks like myself years ago being hesitant to invest in questionable markets or to miss out on losses already generated. Fully understanding the rule is freedom to never think twice about timing the market; if you get gains, great, if you have losses even within 30 days you can reap tax savings. It’s a win-win for the long term investor to invest in all markets all the time.
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Coming out of training this summer and plan and know I will need to open a taxable account. What’s the best way to keep track of your tax losss harvesting for oneself and for the sake of the IRS?
2)What can you use short term losses for I typically plan on a more buy and hold approach? Can you just allocate the 3,000 a year from the short term losses?
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1) Your 1040 has a sheet that tracks carryover losses that can be carried forward year to year. I use a CPA, personally, but tax software will also do this.
2) Short term losses first offset ordinary income, up to $3,000 annually, then short-term realized gains, then long-term realized gains.
Cheers!
-PoFReply
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