Tax Loss Harvest -- options/advice

[fmsailor]

Is it a wash sale to tax loss harvest from VUSTX to individual Treasuries (and vice versa)?  How about VUSTX to VGLT? Too similar to justify or not?

VBLTX would be more of a clear difference. It didn't behave well during the fall of 2008 though. Might be a parking place for 60 days until one could get back into VUSTX. Risky though...

[craigr]

I prefer to just wait 31 days and buy right back into what I want to own. The worst thing is to swap and rack up gains in a fund you are less than happy with and then be forced to either keep it or sell it and pay taxes. It's a coin flip whether waiting the 31 days will help or hurt being out of the market. I find it comes out in the wash and at least waiting 31 days I don't have to worry about the IRS questioning the transaction.

Since I own individual bonds that have been bought over time, I can easily sit out for 31 days if I have losses but still have exposure to LT bonds with my holdings that would be above water. If that helps...

[BearBones]

I am of the opposite opinion, especially when selling the whole thing. I would be very nervous being out of the market for a month with 25% of my assets. IMO, you are much safer switching to a similar but not identical fund/eft. Both VUSTX to pure treasuries or VGLT are far from identical, and I cannot imagine this being questioned. Ask a bunch of accountants, and I would be shocked if anyone disagreed. Maybe a S&P 500 fund to another S&P 500 fund, but not this.

If you have gains in the temporary fund during the month, it is unlikely that it will greater than the capital losses you are claiming, so you benefit from the difference. No taxes owed. And there is equally a chance that you will rack up even more losses.

[craigr]

Each person is going to be in a different situation. Over time, it is likely that there are going to be different lots that will have losses and some still have gains. It would be unusual to have 25% all be in a tax loss situation for very long into the future. This is the problem with relying on tax loss harvesting. Over time all the assets tend to creep up in value over the initial costs basis. Barring a major drop like in 2008, chances are over time most investors are going to find most of their assets are not going to be candidates for any kind of harvesting.

But with that said, take advantage of it if you can. Personally unless the loss is around -10% in an asset I would leave it alone. In a month that kind of loss could easily recover and gains missed. Over 10% loss chances are it won't recover so you'll still be ahead waiting. But this is not a science and it's all probabilities and personal judgement based on your own situation.

Generally though I like keeping things simple and I don't want to own a lot of different funds doing the same thing I'm swapping around. With bonds in particular, I want to own them directly - period end of story. So there is no option really for me because I'm not willing to swap into a fund from individual bonds. I will simply wait.

Now if you have the chance to swap out of a fund and go to directly owned bonds? I would swap, take the losses, and buy the bonds directly. The 31 days probably wouldn't matter as they would be significantly different.

[fmsailor]

It seems VUSTX or VGLT into pure treasuries (or vice versa) are not substantially identical due to the non-treasury holdings in VUSTX and VGLT. There is also the difference of active management vs individual bonds difference too. But is it enough of a difference?

Note -- I have no idea what I'm talking about so please don't take any "it seems" from me as being backed by any experience or anything... 

To take it once step further -- what about buying a 30 year bond at auction. Say you hold it for 2 years and you have a loss. You sell it and immediately buy a 30 year bond on the secondary market. That's a wash sale, right? Or are they not substantially identical?

In reality I'd most likely just rebalance with new money -- and Bob's your uncle.

Just kinda curious where the limits of "substantially identical" are.

[craigr]

Just kinda curious where the limits of "substantially identical" are.

There's the rub! IRS audits will be guilty until proven innocent. If you wait 31 days there is no debating the issue with the them.

[BearBones]

If you look at the holdings of VUSTX and VGLT on yahoo finance or similar, the portfolio composition is different both in the % of the portfolio that is bonds, and the maturity of the bonds they hold. The IRS would be hard pressed to make a case that they were substantially identical. This is even true of VTI vs SCHB where the top 10 securities are not even held in the same order let alone in the exact same percentages. They are hardly identical. Close, yes, but not identical.

Agree. Not even close.

I have only tax loss harvested after 2001 and 2008, both before I started PP. So, I sold complete holdings, bought similar but not identical, and racked up tons of capital losses. Going forward, I hope for this not to be so easy, so I certainly get your point, Craig, about tax-loss harvesting with only a portion of the individual lots. In that case, I would just wait 31 days. In fmsailor's case, I'd do one of the trades proposed if 1) losses exceed 10% (as you suggested) and 2) if selling all or a large % of the asset.

Agree?

[craigr]

In fmsailor's case, I'd do one of the trades proposed if 1) losses exceed 10% (as you suggested) and 2) if selling all or a large % of the asset.

Agree?

These things are just too complicated to say with clarity because each person is different. Before fmsailor does anything they should probably talk to an accountant that understands their tax situation. I'm cautious about blanket advice to direct questions. There are too many unknowns. In general I just write what I do and it may or may not apply to all situations. Just food for thought for someone to consider as they work out the numbers and particulars to their portfolio.

[fmsailor]

Thanks for all the information. I'm going to ask my tax people to take a look at the situation and get their take on it. This is all hypothetical and out of curiosity for me anyway. You nailed it -- each person's situation is different.

Example:
I'm 100% comfortable maintaining the portfolio in a brokerage account combining ETFs, individual bonds, and mutual funds.

My spouse is not in the least...nor the least bit interested. Only regular mutual funds make sense -- put money in just like regular online banking. No spreads, order types, or time constraints to deal with.

We decided that ETFs and individual bonds are out given our combined 50% comfort level. This limits our choices for the bond portion, but it sure does make things simple.

So my rough calculation shows our PP implementation is going to be 75% Level 1 and 25% Level 3. That puts us at a Level 1.5 PP implementation.  Sweet-n-simple...