TAX-LOST HARVESTING: Worth it for the PP??

[coinstar]

On Bogleheads I read about TAX-LOST HARVESTING where you have your investments in a taxable account (say a SP500 mutual fund) and if the fund loses money, you SELL it, and immediately buy a different SP500 fund. The IRS says this is NOT a wash sale and you get an immediate tax write off.

With the PP, there seems to be a mixed bag in opportunities for this because you want to hold the long term bonds in tax sheltered accounts like retirement because of needing to pay regular taxes on the interest rates.

SUPPOSE you did want to tax lost harvest and held some bonds in taxable. Given interest rates are still below 3% (2.6% on TLT right now) it seems like the chance of an opportunity to start holding some bonds in taxable for this opportunity.

This would guarantee that either your stocks in taxable OR your bonds in taxable go down quite a bit in any given year and you sell and lock in loss for the tax benefit.

The cost is your paying income taxes guaranteed on that 2.6%. but compared to being able to write off a possible 30% drop in the bond fund, that seems like a small cost.

Suppose interest rates go up. Well that makes holding bonds in the taxable account more expensive BUT since they are bonds and you bought them at 2.6% rate, when rates rise, the principal goes down and you get a nice loss. Then when you sell, you simply choose not to buy them back in taxable (and switch cash or stocks there instead), and buy them back in your tax deferred retirement vehicle of choice.

So I'm thinking of splitting my taxable money into Stocks and Bonds since I'm in a high tax bracket this year due to a windfall at work and if I can tax-lost harvest the maximum allowed $3,000 loss against my regular income, that saves me around $1,000 in taxes which more than pays for the taxes I'll have to pay on the 2.6% interest rate on $20k worth of bonds (which is around $150 to $200).

I guess the worse-case scenario is if both stocks and bonds stay fairly neutral or both go up and then I paid the taxes and STILL don't get a tax-lost harvest!!

[Greg]

On Bogleheads I read about TAX-LOST HARVESTING where you have your investments in a taxable account (say a SP500 mutual fund) and if the fund loses money, you SELL it, and immediately buy a different SP500 fund. The IRS says this is NOT a wash sale and you get an immediate tax write off.

With the PP, there seems to be a mixed bag in opportunities for this because you want to hold the long term bonds in tax sheltered accounts like retirement because of needing to pay regular taxes on the interest rates.

SUPPOSE you did want to tax lost harvest and held some bonds in taxable. Given interest rates are still below 3% (2.6% on TLT right now) it seems like the chance of an opportunity to start holding some bonds in taxable for this opportunity.

This would guarantee that either your stocks in taxable OR your bonds in taxable go down quite a bit in any given year and you sell and lock in loss for the tax benefit.

The cost is your paying income taxes guaranteed on that 2.6%. but compared to being able to write off a possible 30% drop in the bond fund, that seems like a small cost.

Suppose interest rates go up. Well that makes holding bonds in the taxable account more expensive BUT since they are bonds and you bought them at 2.6% rate, when rates rise, the principal goes down and you get a nice loss. Then when you sell, you simply choose not to buy them back in taxable (and switch cash or stocks there instead), and buy them back in your tax deferred retirement vehicle of choice.

So I'm thinking of splitting my taxable money into Stocks and Bonds since I'm in a high tax bracket this year due to a windfall at work and if I can tax-lost harvest the maximum allowed $3,000 loss against my regular income, that saves me around $1,000 in taxes which more than pays for the taxes I'll have to pay on the 2.6% interest rate on $20k worth of bonds (which is around $150 to $200).

I guess the worse-case scenario is if both stocks and bonds stay fairly neutral or both go up and then I paid the taxes and STILL don't get a tax-lost harvest!!

I believe PointedStick spoke about this at one point but another option you have is to hold two-PPs. One as a taxable account and one in a tax-deferred/non-taxable account. That way, whenever you need to rebalance, if you're selling for capital gains, you sell from your non-taxable and if your'e selling from your capital losses, you sell from your taxable for the tax-loss harvesting.

[Mike59]

The IRS says this is NOT a wash sale and you get an immediate tax write off.

Lucky for you Americans- In Canada we cannot rebuy the same fund or any tracking the same index for 30 days otherwise the capital losses are nondeductible.

[sophie]

All excellent points.  I've got some bonds in taxable too, but it's relatively low priority.  For one thing, realize that you may be paying that $200 in interest for years before getting to claim that tax loss.  I prioritize gold and stocks for taxable...gold incurs no taxes until you sell, and in the lower tax brackets you won't have to worry too much about taxes on dividends and capital gains.  I know some people keep multiple PPs but I like to let it sprawl over multiple account types, because there are so many ways to place assets for best advantage.

For example, here's a way you can effectively tax-loss harvest from a tax-deferred account (i.e. 401K, trad IRA):

Let's say you hold stocks (or any other volatile asset) in a tax-deferred account, and a comparable amount of cash in a Roth IRA or in taxable.  The market crashes, so that the value of your stocks decreases.  If you sell the stocks in tax-deferred and buy an equal amount of the same fund in the Roth/taxable, you've avoided paying income tax on the amount of the loss - which is exactly the same benefit that you get from tax loss harvesting, but without even having to worry about wash sale rules.

Also if you have stocks in taxable and you're in the 15% bracket or below, don't forget to "tax-gain harvest", i.e. sell and buy to increase your basis without incurring tax.  Then if a big drop happens you're more likely to reap a nice profit from the tax loss.

[MachineGhost]

Also if you have stocks in taxable and you're in the 15% bracket or below, don't forget to "tax-gain harvest", i.e. sell and buy to increase your basis without incurring tax.  Then if a big drop happens you're more likely to reap a nice profit from the tax loss.

Do the wash sale rules or anything like that apply?  That's a pretty cool strategy.  I'm still carrying over the T-Bond losses from when I sold exactly at the bottom.  Can't get any better than that, huh!

[ochotona]

Sophie, you kind of lost me on tax-loss harvesting in an IRA... so you'd sell a losing stock in an IRA to lock in the loss, impacting the future value of your IRA really forever after so that when you liquidate the IRA your taxes are less, and buy the same stock in a taxable account at it's lower level? Is that the idea?

[Libertarian666]

Also if you have stocks in taxable and you're in the 15% bracket or below, don't forget to "tax-gain harvest", i.e. sell and buy to increase your basis without incurring tax.  Then if a big drop happens you're more likely to reap a nice profit from the tax loss.

Do the wash sale rules or anything like that apply?  That's a pretty cool strategy.  I'm still carrying over the T-Bond losses from when I sold exactly at the bottom.  Can't get any better than that, huh!

No, the wash sale rules do not apply to sales at a gain, even if the gain is taxed at 0%.

[sophie]

Sophie, you kind of lost me on tax-loss harvesting in an IRA... so you'd sell a losing stock in an IRA to lock in the loss, impacting the future value of your IRA really forever after so that when you liquidate the IRA your taxes are less, and buy the same stock in a taxable account at it's lower level? Is that the idea?

Just a crazy idea I had to get out of having to pay income tax on withdrawals from a tax-deferred account.  The idea is to take advantage of market volatility to "transfer" losses to the tax-deferred account.  If you sell stocks then buy, you have a zero net change in your stock position, BUT - the value went down in the tax-deferred account (before paying taxes) and later it will go back up in your post-tax account (Roth or taxable).  Voila, taxes avoided.  Does this make sense or am I missing something?

re tax gain harvesting: I think there's a bogle wiki on it.  It's not a wash sale because you aren't claiming a loss, just reporting a gain on your income tax return that doesn't get taxed, and increasing your cost basis.

[ochotona]

Just a crazy idea I had to get out of having to pay income tax on withdrawals from a tax-deferred account.  The idea is to take advantage of market volatility to "transfer" losses to the tax-deferred account.  If you sell stocks then buy, you have a zero net change in your stock position, BUT - the value went down in the tax-deferred account (before paying taxes) and later it will go back up in your post-tax account (Roth or taxable).  Voila, taxes avoided.  Does this make sense or am I missing something?

re tax gain harvesting: I think there's a bogle wiki on it.  It's not a wash sale because you aren't claiming a loss, just reporting a gain on your income tax return that doesn't get taxed, and increasing your cost basis.

I think it makes sense. But, it seems to work only in one direction; from tax-deferred to the outside. This will leave a "cashy" tax-deferred account. Over a long period of time, it could lead to less than optimal use of the tax-deferred space, because gold ETFs, stocks, and T-bonds will all eventually have losses to harvest.

[buddtholomew]

In response to the OP, selling TLT in taxable and purchasing the same fund in tax-deferred violates the wash sale rule.

I plan to TLH gold in taxable and replace with physical. So, yes, it is beneficial to TLH the PP. Same can be done with TLT and individual treasuries or SPY and VTI.

[ochotona]

The tax wash harvesting rules apply between spouses, to any corporations you control, and you can't sell at a loss in a taxable account and buy within 30 days before or after the sale in a retirement account. IRS Publication 550.

[Dieter]

The tax wash harvesting rules apply between spouses, to any corporations you control, and you can't sell at a loss in a taxable account and buy within 30 days before or after the sale in a retirement account. IRS Publication 550.

Change from S&P 500 to Total Stock market (or other way) for the stock part to avoid the wash sale rule.

I assume TLT to/from EDV are probablydifferent enough

[ochotona]

Another idea along the SP500 to VTI idea, go from a gold ETF to a mixed metals ETF, just for 31 days.

[sophie]

I think we'd decided that you could switch between GTU and IAU to avoid wash sales.  But if you're switching to physical there's no need to worry about wash sales.

For bonds, you can simply buy a different 30 year treasury to avoid the wash sale.

[Tyler]

Luckily, I have more than enough losses from my pre-PP days to carry over for quite some time. I guess I could claim I was a tax loss specialist.  I'm just happy to have gains to offset now.

You can do a lot worse than simply parking the harvest amount in cash for 31 days.  Nothing requires you to harvest an entire asset all at once.  Space it out over a few months and you'll never hit a rebalance band. Try not to over-think it.

[dragoncar]

Apologies for necrothreading, but doesn't make sense to start a new topic.

Does tax loss harvesting really provide a big advantage?  Assume I already have enough of a banked loss that I max out my $3k regular income deduction per year (I do).  Is it worth swapping my PHYS for CEF for 31 days, and then back to PHYS?  I'll get the loss, but it won't really change anything come tax time. 

[jason]

Isn't there a risk with tax loss harvesting in the event the asset you exchanged then quickly shoots up in price and you need to rebalance? This could force you to either pay short term capital gains (at the ordinary income tax rate) or else delay rebalancing, I would think. So, if you sell your VTI and buy FSTVX, and the stock market then skyrockets 6 months later, you will get killed on taxes when you sell FSTVX to rebalance. And you can't even use your long term capital loss from selling VTI to offset the short term capital gain in FSTVX. Murphy's Law dictates this will happen.

[ochotona]

Refer to the CUSIP code. If the same CUSIP code, it will be disallowed as a wash sale.

[dragoncar]

Isn't there a risk with tax loss harvesting in the event the asset you exchanged then quickly shoots up in price and you need to rebalance? This could force you to either pay short term capital gains (at the ordinary income tax rate) or else delay rebalancing, I would think. So, if you sell your VTI and buy FSTVX, and the stock market then skyrockets 6 months later, you will get killed on taxes when you sell FSTVX to rebalance. And you can't even use your long term capital loss from selling VTI to offset the short term capital gain in FSTVX. Murphy's Law dictates this will happen.

I never quite understood the importance of Long term vs short term loss.  Every time I read about it I'm pretty sure any loss will cancel a short term gain.  Is this wrong?  Your temporary replacement shoots up in value so you have a gain but isn't it more than offset by your loss?

If gold did shoot up so high in a month it gave me significant taxable gains I probably wouldn't complain

[bedraggled]

Which broker(s) have commission free ETFs?  It seems TD Ameritrade is happy to charge $9.99 on all ETF trades.

Thanks.

[barrett]

Which broker(s) have commission free ETFs?  It seems TD Ameritrade is happy to charge $9.99 on all ETF trades.

Not an expert but I would check out Fidelity. My overall experience with them has been superior to that at TD. I only opened up a TD account with the idea of institutional diversity in mind (see Craig and MT's book).

[dragoncar]

Which broker(s) have commission free ETFs?  It seems TD Ameritrade is happy to charge $9.99 on all ETF trades.

Thanks.

TDAmeritrade offers 100+ commission-free ETFs, including many by Vanguard. Annoyingly, you have to sign up for the program by calling in and requesting, or by logging into your account and making the election online. AFAIK, they are the only broker with that idiotic requirement, but it's easy enough to do, and the election is a one time issue.

Yeah, they were nice enough to refund the fee on my first trade when I asked them about this, but it's just a money grab for the unwary

[jason]

Isn't there a risk with tax loss harvesting in the event the asset you exchanged then quickly shoots up in price and you need to rebalance? This could force you to either pay short term capital gains (at the ordinary income tax rate) or else delay rebalancing, I would think. So, if you sell your VTI and buy FSTVX, and the stock market then skyrockets 6 months later, you will get killed on taxes when you sell FSTVX to rebalance. And you can't even use your long term capital loss from selling VTI to offset the short term capital gain in FSTVX. Murphy's Law dictates this will happen.

I never quite understood the importance of Long term vs short term loss.  Every time I read about it I'm pretty sure any loss will cancel a short term gain.  Is this wrong?  Your temporary replacement shoots up in value so you have a gain but isn't it more than offset by your loss?

If gold did shoot up so high in a month it gave me significant taxable gains I probably wouldn't complain

I could be wrong about this.  In searching online, it appears that perhaps a short term capital gain can be offset by either a short term or long term capital loss.

[bedraggled]

Thanks, folks.