Tax Loss Harvesting with Vanguard: A Step by Step Guide

When the stock market hiccups, as it is known to do from time to time, you may have one of several common reactions.

  • What?!? I just lost 10% of my net worth. This is horrible!
  • Meh. A 10% market correction happens in most years. It will bounce back. Eventually.
  • Cool! Let’s see what I can tax loss harvest.

 

The stock market is volatile, and it’s not unusual to see downward swings of 5% to 10% in a few days’ time. While seeing several years’ worth of spending erased from your balance sheet is less than awesome, you’re invested for the long haul.

I’m always looking for a silver lining, and I found one in not only having the ability to tax loss harvest a recent investment, but also in capturing the screen shots to share with my audience.

I have previously written about how I used tax loss harvesting to Brofit from the Brexit, but this post represents the first time I had the forethought to save the images each step of the way. Note: This article was originally published in February of 2018 and was updated in December of 2018.

 

Tax Loss Harvesting with Vanguard: A Step by Step Guide

 

What is tax loss harvesting (TLH)?

 

TLH is a way to capture a “paper loss” by selling an asset that has declined in value and subsequently purchasing a similar asset to avoid locking in an actual loss. This only works in a taxable brokerage account, also commonly referred to as a non-qualified brokerage account or simply brokerage account.

Note: it is not required that you purchase a similar fund. You can also choose to allow that money to sit out of the market for 31 days and buy back the fund you sold or you can invest in something completely different right away. However, by waiting, you may miss out on a quick rebound and by investing in something unrelated, you’re altering your asset allocation. It’s best to maintain an IPS and stick with it.

In tax-advantaged retirement accounts, such as an IRA, 401(k), 403(b) or similar accounts, there are no tax implications when buying and selling within the account, and you cannot tax loss harvest to your benefit.

The amount of any tax loss harvested in a taxable account will first be used to offset any capital gains (if any) taken in the same calendar year. Remaining losses will be deducted from ordinary income when you file your income taxes, up to $3,000 per year, resulting in savings of $1,000 to $1,400 for the typical high-income professional.

If Uncle Sam is willing to give me $1,000 or more per year for deciding to swap some shares of a Total Stock Market Fund for the S&P 500 index every once in a while, I’ll gladly take them up on that offer time and time again.

If “paper losses” exceed $3,000 in any given year, the excess losses can be carried over to subsequent years. In 2016, a year in which the market actually saw a double-digit gain, I tallied over $50,000 in losses early in the year, giving me over 15 years worth of $3,000 deductions from 2016 alone.

A handful of timely transactions in prior years have saved me thousands of dollars already (I also harvested about $30,000 in losses in 2015), and those savings have the potential to continue to save me $1,300 or so per year for decades as long as my income keeps me in the upper tax brackets.

Carryover losses can also be used to offset capital gains in the future in the event that I’d like to sell some funds to access cash from my investments in a taxable account. Every dollar of capital gains that would normally be taxed is offset by a dollar in tax losses previously harvested.

 

 

What are Tax Loss Harvesting Partners?

 

TLH partners are assets that are similar (have a high correlation) but are not “substantially identical.” That last phrase belongs to the IRS, and it hasn’t been defined precisely, but conventional wisdom is that a fund following a different index is different enough.

Funds that follow the same index, but are offered by different companies (i.e. Schwab’s SWTSX & Fidelity’s FSTVX, both total stock market funds) would be considered by most to be substantially identical, and are not a wise choice as partners. Both mirror the Dow Jones Total US Stock Market Index.

Vanguard’s VTSAX, however, follows the CRSP Total US Stock Market Index. While the index is similar to the index mirrored by the Schwab and Fidelity funds, it could be argued they are not substantially identical and therefore one could exchange a Vanguard total stock market fund for one from Schwab or Fidelity (and vice versa). This ould perhaps be considered a gray area that the IRS has not offered guidance for.

A similar argument could be made for trading back and forth between any of these funds and Fidelity’s no-fee Total Market Index Fund, FZROX.

I would not consider the ETF version of the mutual fund you’re selling at a loss (or vice versa) to be a valid partner. Look for assets that are following different indices.

A good partner is not only at least a tiny bit different, but also one you would not mind holding indefinitely. If you’re going to exchange or trade into the fund, you should be comfortable with that asset rising in value and remaining in your account for years.

A fund with a substantially higher expense ratio would be a poor choice. I would also advise against trading a tax-efficient passive index fund for an actively managed fund that might spin off excessive capital gains. The tax consequences of holding such a fund long-term could negate the benefit of the tax loss harvesting.

Are you getting the most out of the business credit card in your wallet? Check out the top business credit card offers today.The Best Business Credit Cards
The following are some decent trading partners. I use Vanguard mutual funds, but you should be able to find similar partners in mutual fund or ETF form from your favored broker, be it Fidelity, Schwab, iShares, or whomever.

  • Total Stock Market / S&P 500 / Large Cap Index
  • Total International / All-World Ex-US / Developed Market
  • Small Cap Index / Mid Cap Index / Extended Market

 

I’ve only traded in the first two categories, as I keep my small and mid cap funds in tax-advantaged accounts. I have gone one step further in the international category, trading developed markets for European and Pacific indexes. Frankly, I was happy to see those drop further so I could jump back into a total international fund later on, so I wouldn’t necessarily recommend such a move, as it violates the principle I mentioned above about only exchanging into funds you’d be comfortable owning forever.

Of course, if you’re feeling charitable, you could always consider donating unwanted or suboptimal funds to a donor advised fund if they do eventually experience significant gains.

You could also look at harvesting losses in municipal bond funds (you shouldn’t hold tax-inefficient non-muni bond funds in taxable), but those don’t experience the wild price swings that stocks do, so it’s unlikely you’d see meaningful opportunities to harvest sizable losses with bonds unless you have a huge bond balance.

Tax Loss Harvesting Dangers

 

Perhaps danger is a strong word, but there are plenty of ways to screw this up, which is why many investors don’t bother with it or rely on a Betterment‘s algorithm to do the tax loss harvesting for them.

But really, the worst you can do is negate the tax benefit of your efforts, and most mishaps only partially reduce the amount of the loss you’ll take (assuming you choose to report the mistake).

What you want to avoid in the 30-day window before and after tax loss harvesting is a wash sale. A wash sale is a purchase of identical or “substantially identical” replacement shares of an asset you sold at a loss during that 61-day (30 days before and 30 days after, plus the day of the sale) timeframe.

You also want to be sure your cost basis determination is not set to First In First Out or Average Cost in your taxable account. You want each lot to be recorded with the purchase price, and you want the ability to sell each purchased lot individually.

With Vanguard, you do this by selecting Specific Identification (SpecId) as your cost basis for all funds held in a taxable account.

 

Vanguard Cost Basis

 

I suppose another “danger” is missing an opportunity to TLH. Waiting for a loss to get bigger can be a fool’s errand. It makes sense to have a threshold dollar amount at which you’ll consider harvesting a loss. Perhaps it’s $500 or $1,000. Once that threshold is crossed, I would seize the opportunity. If the asset class continues to drop, you can TLH again into a third partner within 30 days, or back into your original position beyond 30 days.

 

How to Avoid a Wash Sale

 

The simple answer is to avoid buying replacement shares a month before and after tax loss harvesting. It sounds simple enough, but there are several ways to unwittingly foul this up.

The most likely way to inadvertently create a wash sale is with automated new investments and automated dividend reinvestments. Let’s look at each of these individually.

Automated investments often take place in a tax-advantaged account like a 401(k), 403(b), 457(b), or SEP or SIMPLE IRA. While investments in these accounts may not be noticed by your taxable brokerage account or the IRS, it’s best to avoid any gray areas, even if the impetus to report them may be on you.

Note that replacement shares purchased in a spouse’s accounts can also trigger a wash sale. Whether your finances are separate or combined, you’ll each have your own tax-advantaged accounts, and the IRS looks at your accounts as being under one umbrella when it comes to tax loss harvesting and wash sales.

 

How do you avoid automatically investing into a substantially identical asset in a tax-advantaged account shortly before or after tax loss harvesting in a taxable account?

 

The simplest way is by investing in different asset classes in your tax-advantaged accounts.

I accomplish this by investing in small cap, mid cap, and emerging market stock indices in my tax-advantaged accounts, while investing in large cap and total international / developed markets in taxable. See my portfolio for full details.

Such a strategy doesn’t jive well with a simpler three-fund portfolio, but I feel the benefits of tax loss harvesting outweigh the benefits of simplicity. I also like optimizing, even if it’s at the expense of simplifying.

 

How do you avoid reinvesting into a substantially identical asset class after tax loss harvesting?

 

This is straightforward. Avoid automatically reinvesting your dividends. Manually reinvest them four times a year (or however often your receive dividends). You may want to set up a calendar reminder — I consistently receive dividends from Vanguard late March, June, September, and December.

I have my taxable mutual funds set up to send all dividends to a Vanguard money market fund. In the fourth week of months 3, 6, 9 and 12, I manually reinvest the dividends. If I have recently taken advantage of a tax loss harvesting opportunity, I don’t buy into the fund I just sold.

If you’re afraid you won’t notice the dividends hit your money market fund, have them sent to your checking account where you’ll be more likely to see them, and reinvest from there.

The Chase Ink Business Cash Card

No Annual Fee, a $500 welcome bonus with $3k spent in 3 mo. & up to 5% cash back on certain purchases. More on why it's one of my favorite cash back business cards here.

 
If you do accidentally goof this up and create a wash sale, it’s not a huge deal. When you invest or reinvest into a fund that you sold at a loss within 30 days, you’re most likely purchasing a smaller amount than you sold.

For example, if you sell 100 shares at a loss and you automatically invested or reinvested in 10 shares, you can still take the loss on 90 of those 100 shares. This is known as a partial wash sale. If you purchase 100 or more substantially identical shares within the 30-day window before or after capturing a loss by selling 100 shares, the tax benefit of your efforts is indeed eliminated.

I have my investments set up in a way that a wash sale is very unlikely, but one of my favorite Bogleheads who goes by the moniker livesoft, the resident TLH guru, has intentionally created a wash sale as a public service. See his tutorial on what not to do, and how to file the appropriate tax forms if you do end up with a wash sale despite your best efforts.

 

Tax Loss Harvesting with Screenshots

 

So what does this look like in practice? Like I’ve done with my Backdoor Roth maneuvers, I took screenshots to make this as straightforward as possible.

 

Step 1: Recognize a loss has occurred

 

You can’t harvest a loss that you don’t know about. I track my investments with Personal Capital, and if you choose to do the same, you’ll help enhance this site’s charitable mission.

I typically like to see a loss of at least $1,000, but TLH opportunities (for better or worse) have been hard to come by over the last couple years. When the market dropped a bunch after a recent investment, I pulled the trigger.

Note that I only held these shares for four trading days. Did I create a wash sale by selling shares of a mutual fund that I purchased a few days earlier, well within the 30-day window?

No. The shares I bought were not replacement shares for the ones I sold; they were the ones I sold. If I had bought two lots and only sold one lot, then I’d have issues, but as long as you sell all shares purchased in the last 30 days, you won’t create a wash sale.

 

 

Step 2: Select the lot(s) to sell or exchange

 

Using mutual funds, I don’t have to bother with a settlement fund, and there’s no downtime where my money is not invested. I simply exchange from one mutual fund to another, and the swap takes place at the end of the trading day.

In this case, my very recent $10,000 investment in Vanguard’s Total Market Stock Index (VTSAX) had lost a few hundred dollars in the first three trading days since I purchased the lot on February 2nd, and well into the fourth trading day, it was on track to lose a few hundred dollars more.

Taking advantage of this situation feels like being allowed to bet on the winner of a football game late in the fourth quarter when the home team’s up by three touchdowns. As long as the trade is entered before the market closes, the transaction will go through based on the closing price.

 

Tax Loss Harvesting Vanguard-1

 

After logging into my taxable brokerage account at Vanguard, I click on “Exchange” in the mutual fund that has a loss.

I am then presented with a list of lots purchased, along with the gains or losses in each. Only the most recently purchased lot has a loss, and I select it.

 

Tax Loss Harvesting Vanguard-2

 

Step 3: Select the TLH Partner to Purchase

 

On the next screen, you’ll verify the fund you are selling on the left.

 

 

 

On the right, you’ll select the fund you’ll be purchasing with the proceeds of the sale you’re making at a loss. This will be your tax loss harvesting partner. If you don’t already own shares in the fund, you’ll be able to add it from this page. Each of the funds I own appear in the list, including my chosen TLH partner, the S&P 500 index fund.

 

 

Note that it looks like I’m only harvesting a loss of $283.37 ($10,000 – $9,716.63), but late in the trading day, the market was down another 4% or so, and I could count on a bigger loss barring a crazy last-minute Tom Brady-esque rally. Using ETFs, you could lock in the loss at the moment you choose to sell.

 

Step 4: Confirm the Tax Loss Harvest

 

After pressing continue, you’re done. At that moment, you’ll be presented with a confirmation.

 

 

The amount you’re selling from one fund and buying into another is based on the prior day’s closing price and is not representative of the final trade. Hence, the asterisk.

The next day, you can log in to see the true value of the paper loss you tax loss harvested.

 

 

The loss more than doubled in size from an estimated $283.37 to the actual $637.97. I had a pretty good idea this would be the case, as the stock market was down big late in the trading day when I set up this exchange.

A day or two later, I received a confirmation of the trade, which is essentially the same information you see above in a different format, but with the closing price on the day you made the exchange, representing the true value of the paper loss.

 

TLH Vanguard Confirmation

 

Under “Notes:” I am told that Vanguard won’t let me buy back into this fund in the next 30 days to comply with their frequent-trading policy. That’s a good thing — the last thing I want to do is buy more VTSAX and create a wash sale. Vanguard is protecting me from making a bonehead move, and I appreciate that.

 

 

Tax Loss Harvesting Summary

 

That’s all there is to it. Sell lot(s) that have lost money, buy something similar that’s not the same, and you’ll receive a 1099-B from your brokerage reporting a year’s worth of TLH efforts. Below is an excerpt of my Vanguard 1099-B from 2016 showing a total of $45,449.15 in short-term losses and $6,212.57 in long-term losses.

That saved me roughly $1,400 in taxes on my 2016 tax return, with another 16 years’ worth of carryover losses.

Note that you are not actually losing money when you tax loss harvest. You are selling one fund that has dropped in value and buying a similar (but not identical) fund that has similarly lost value. You are not out of the market for one minute when doing this with mutual funds. You are simply taking the loss against your tax burden and lowering your cost basis.

 

 

As daunting as the concept may at first seem, tax loss harvesting is not a difficult task. I hope I’ve made the benefits clear and the process approachable.

I hope you’ve learned enough to take advantage of this excellent and perfectly legal way to lower your tax burden. If you’d like to learn more from me, subscribe to receive my emails and I’ll send you a very useful spreadsheet to help you with your finances and help you reach financial independence!

 

 

 

Happy tax loss harvesting!

 

164 comments

  • abc

    I am confused by this strategy. Wouldn’t the lowered basis on the replacement purchase & subsequent long-term cap gain offset the long-term cap losses that are being harvested ?

    • There are a number of advantages, even if you do eventually recapture the cost basis.

      First, you can deduct $3,000 in ordinary income per year for the losses you take. That saves you at your marginal state and federal income tax rates, which are almost certainly quite a bit higher than LTCG tax rates.

      Second, even if you were to pay the tax later after taking a deduction now, you get the use of that money and its earnings while it’s “on loan” from the government.

      Third, there are a number of ways to avoid capital gains taxes or minimize them, particularly in retirement when you’ll actually be accessing this money.

      Best,
      -PoF

  • Subscribe to get more great content like this, an awesome spreadsheet, and more!
  • Mark

    I currently have a two fund portfolio across 5 accounts with VTI and BIV. I hold BIV and VTI in my SEP-IRA and VTI only in my taxable, his roth, her roth and HSA. DRIP enabled in all accounts except for taxable. (I contribute to taxable account manually each month.) When I looked at tax-loss harvesting some recent VTI purchases in taxable I saw that I had automatically purchased VTI via DRIP in all my qualified accounts within the past 30 days (which would cause a wash sale if I sold VTI for a loss in my taxable acct only). Could I get around this problem by holding VOO in all accounts except the taxable account where I’d hold VTI? If so, then I guess I’d have to TLH from VTI into something other than VOO (in taxable) for this to work going forward, correct?

  • vikas

    A very informative article, thanks for writing this!

    What will you advise for TLH on my portfolio
    * I am in the highest tax bracket (37% Federal and 11% state)
    * 2018 Short-Term Loss = $40000 (VWO – $26000 Loss, VEA – $1000 Loss, and FB – $8700 Loss)
    * 2018 Short-Term Gain (Realised) = $22000 (INTU)
    * 2018 Long-Term Gain (Realised) = $21000 (INTU)
    * 2018 Long-Term Gain (Unrealised) = $55000 (INTU) I am planning to sell these stocks next year (2019) to reduce my risk on one stock and move this money to VTI or similar ETF based upon on Asset Allocation.

    TLH plan:
    * Sell VWO and other losing assets for TLH and buy some other IndexFund/MF like IEMG.

    Tax Situation and options:
    * Sell all 4 losing assets and take $40000 short-term loss.
    * Then use $22000 from that short-term loss to offset my short-term gain of $22000 this tax year and save roughly $8800 tax (based on my ordinary income tax, for keeping calculation simple, I just used 40%).
    * Use rest of the short-term loss $18000 to offset that amount from my long-term gain and save roughly $3600 tax (based on 20% long-term gain tax).
    * Total Tax saved in this case is roughly $12400.

    Question:
    * I am planning to sell VWO for TLH and buy IEMG so that I do not loss exposure to emerging market if emerging market rebounds in next 1-2 months. However IEMG pays their dividend twice a year and if I buy IEMG now, their dividend in December paid to me will become non-qualified if I do not keep IEMG for 61 days. Any other advice (other than keeping IEMG for 61 days) so that I can avoid making IEMG dividend non-qualified? What about I keep IEMG only for 31 days and then sell it before IEMG dividend is paid and buy VWO back when I sell IEMG?
    * Is it possible to not use all my remaining short-term loss ($18000) to offset my long-term gain, but use some part of it ($3000) to reduce my ordinary taxable income this year to squeeze some more tax savings?
    * Is there any option/possibility to save more on the tax that I am not able to foresee based upon my limited knowledge?

    • There’s a lot there, Vikas, and it sounds like you have a good handle on things. Regarding the intricacies of the dividend schedule with the various funds, that’s beyond what I can tackle here. You may want to try Bogleheads or the WCI forum, where others will have more time and expertise to share.

      I can tell you that you only get to offset ordinary income after any capital gains have been canceled out by losses. ST losses can cancel out LT losses (once all ST gains have been canceled out). If you have more realized gains than realized losses in a year, you cannot take a deduction on your income from the tax losses.

      Cheers!
      -PoF

  • Ming-Tyh Maa

    Amazing post, thank you.
    I changed all of the dividends for every account, brokerage + retirement to settle to my checking account as you had stated. Just to confirm, gains in any account obviously do not threaten a wash sale, and can continue to remain reinvested right?

    You mentioned that in your accounts your buy 12 times a month.
    Currently I buy VTSAX in my brokerage account EVERY week.

    So if I tried to TLH with VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) ->
    VFIAX (Vanguard 500 Index Fund Admiral Shares), I would have to exchange ALL shares of VTSAX that I purchased in the past 30 days to VFIAX right?

    And then immediately after that I would have to put a HOLD on my automatic weekly purchases of VTSAX for the next 30 days right in my brokerage account as well as any retirement accounts right? I should NOT need to put a HOLD on my auotmatic weekly purchases of VFIAX right?

    Is there a way to rationale an advantage for TLH with weekly automatic purchases as opposed to monthly automatic purchases? Or is monthly automatic purchases superior in its simplicity with TLH?

    • Good questions, MTM.

      Unrealized gains will never cause a wash sale. If you’re not creating a sale, there can be no wash sale.

      You are correct in that you would want to sell all shares purchased in the last 30 days if you are going to sell any shares of that fund at a loss. You’ve got it right about not buying any more shares for the next 30 days, as well.

      As far as how often to purchase funds with automated investing, that’s an individual decision. Whatever works best for you and your cash flow.

      Cheers!
      -PoF

  • I did my first ever TLH last night thanks to you and WCI’s step by step process. I ended up with 10k in losses but had to sell some recent minor gains that I had purchased this month. Still I felt the loss of those gains was worth the overall total loss that I have harvested. I feel like I went a step up in the personal finance hierarchy of sophistication.

  • Dante

    Interestingly I ran into exact the same issue you described in step 1. I sold VTSAX and VTIAX on Oct 26th, although I had purchased them only on Sep 18th. According to your explanation – and thank you so much for it! – it should not create a wash sale, since these were the exact lots I sold.
    Vanguard now flags those as wash sales and I’m writing for and back to get this sorted out.

    This was the first time I manually did TLH and of course was nervous about it. But you’ve done such a great job explaining it, that I finally went on and exchanged those funds for VFIAX (S&P500.)

    Little shocker though that Vanguard does now flag these transactions and I really hope they will reverse their decision. Not sure what to tell them, expect replicating how you explained it.

    If anyone has an idea – I would highly appreciate it!

    • It may be worth a call to Vanguard, or you can wait until you get your end-of-year paperwork from them and see how it plays out on your 1040. I’m guessing you’ll get the loss, irregardless of the Vanguard flag.

      This thread may be helpful.

      Best,
      -PoF

      • Dante

        PoF – Thank you for the link!

        I finally had a phone conversation with a Vanguard rep. She was very interested in my point of view and we were able to clear the details.
        Selling VTSAX did not create a wash sale, since I sold all shares I had acquired within the 30-day period.
        The VTIAX sale on the other hand did create a partial wash sale. I had sold older shares (purchased in Jan and Feb), but at the same time purchased some within the 30-day window. I thought I had marked those for sale as well, but apparently I did not. So the error was on my side by not making sure all required tick boxes were marked.
        At the end the tax impact was not that bad (about 180$ loss can’t be deducted,) but three things to remember:
        1. Vanguard’s customer service is trying to help if you have questions.
        2. Pay attention to the time frame when deciding to TLH.
        3. TLH is easier than I thought, but make sure you have the details correct.

        Thanks again for this awesome thread!

  • Thanks for the detailed post. Haven’t had the chance to use until today, since everything has gone up since I started investing. Harvested $3k in losses today.

  • Pingback: 4 reasons to tax loss harvest—and 1 reason not to – B.C. Krygowski

  • Amy

    Thank you for great detailed information. Any tax loss harvesting partner for Vanguard Precious Metals and Mining Fund ( NEW name: Vanguard Global Capital Cycles Fund)? Thanks.

  • Allen

    What is the basis for the claim that purchasing inside of a 401(k), 403(b), 457(b), etc. constitutes a wash sale? The IRS has only identified IRA and Roth IRA as no-no’s when it comes to buying a substantially similar security within 30 days.

    • Those could be considered gray areas, and I like to avoid gray areas when it comes to the IRS. They haven’t said a transaction in a 401(k) could trigger a wash sale, but they haven’t said it can’t, either.

      Quoting Michael Piper:

      “Wash Sales from Buying in a 401(k)
      Update: A few readers asked whether a wash sale can be triggered when, after selling an investment for a loss in a taxable account, substantially identical securities are purchased in a 401(k) or 403(b).

      This answer is a bit trickier. Section 1091 of 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 from IRS 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 of reasoning in 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.”

      See also this thread on Bogleheads and this article from a Solo 401(k) provider.

      Best,
      -PoF

  • Nice joy

    Thanks a million POF.
    I did my first TLH today.

    • Happy to hear it! Once you get over that hurdle of making that first TLH transaction, you realize it’s pretty darned simple.

      Glad you were able to find a silver lining in this ugly December we’re experiencing in the markets.

      Cheers!
      -PoF

  • Pingback: Saturday Selections - 12/22/18 | Pediatrician Finds Financial Independence

  • H_FIRE

    Thanks you PoF for this helpful post.

    I only have VTSAX in our taxable account. I just checked today and found loss of $1,341.07.

    I have two questions regarding TLH oppotunity:
    (a) Three days ago, I deposited $5,000 into VTSAX. Can I still do TLH or will this be considered wash sale.
    (b) If not, did I lost my opportunity for TLH this year.

    Thanks again.

  • Paul Roch

    PoF, as many have mentioned before, this is an outstanding post that will benefit many people. I started putting together an action plan and this is what I have so far for my situation:
    1. Stop dividend reinvestment on VTSAX on taxable and tax-advantaged accounts.
    2. Stop automatic investment from paycheck on VTSAX
    3. Change cost basis for VTSAX to Specific Identification (SpecId)
    4. Select the VTSAX lot(s) where the loss has occurred to exchange
    5. Select the Tax Loss Harvesting (TLH) Partners for VTSAX.
    —-Potential partners for VTSAX are: (make sure these funds are not held in any other account)
    Vanguard 500 Index Admiral Fund (VFIAX)
    Fidelity Total Market Index Fund (FSTVX)
    Schwab Total Stock Market Index Fund (SWTSX)
    Fidelity ZERO Total Market Index Fund (FZROX)
    6. Submit the order and confirm the tax loss harvest
    7. Wait a minimum of 30 days before going back to VTSAX

    – Am I missing anything?
    – Are there any other potential partners for VTSAX?
    – Should I wait 30 days after doing steps 1 and 2 before doing step 6? (to play it safe)
    – What would be the best approach to select the lots for step 4? (if the goal is to eventually change the cost basis of VTSAX as much as possible to minimize future taxes)
    – I have VTSAX on taxable and on a ROTH IRA (that I’ve used for years to do the backdoor IRA). Should I change the VTSAX on the ROTH IRA to something else?

    Even when I would have liked to do TLH this year I’m OK waiting until next year as I believe this downtrend is going to continue at least a few more weeks.

    Any advice will be greatly appreciated and thanks again for all your guidance!

    • I don’t think you’re missing anything.

      Other partners within Vanguard are VLCAX and VTCLX.

      Regarding the Roth, the only way it could cause an issue is with automated reinvestment of dividends. If you’re doing that, you could have the dividends auto reinvested in a different fund.

      Hope you had a great holiday, and happy harvesting!
      -PoF

  • Gabe

    If you tax loss harvested long term capital loss from total stock market to sp500 on Nov 15 Would yourecommend to tax loss harvest the sp500 to large cap fund on dec 16th to lock in addition so short term capital loss? Is it worth it if trying to keep to a simple 3-5 fund portfolio.

    • In that case, you didn’t buy any replacement shares for 30 days after the tax loss. You could trade S&P 500 for Total Stock Market 12/16. No need for a third partner once you’ve waited out the 30 days.

      Cheers!
      -PoF

  • AK

    Great article
    I have few quick questions.
    1) How do you reinvest the dividends in your roth IRA?
    when i tried to change the setting to reinvest into another vanguard fund, i dont see any option for a money market fund within the roth IRA.

    2) i make frequent contributions to my taxable account on a weekly basis which means there are multiple lots. when i look at the losses in these lots, they can range from a few dollars to several hundred dollars per lot. Is there any threshold that you use per specific lot to decide if TLH is worth it? or do you just look at the total amount gained by TLH from all the lots

    Thanks a lot
    I would appreciate your input

    • 1) I hold different asset classes, so I can reinvest the dividends without issue since there’s no overlap with the large cap / international funds I hold in taxable.

      2) I would sell all the “reds” as in any lots with losses. It’s just a checkbox.

      Best,
      -PoF

  • LawyerStarting2Fire

    I would like to tax loss harvest a Vanguard mutual fund I own that has about $5k in losses. Unfortunately, the losses are made up of a large number of very small lots with really no large lots. I am changing my approach to avoid this happening going forward.
    As such, I’d probably have to sell/exchange at least 50-75 different groups of lots to get to get rid of my losses. Some of the lots are as little as 1 share. Will I have to account for each lot separately, one by one, on my tax return? That is, record date acquired, cost basis, date sold, etc. or can I compute everything together and add it in one place noting that the lots were acquired on multiple different dates and sold on the same date and note the overall short term/long term losses? If the former, it seems it may be more pain than it’s worth to have to account for up to 75 different groups of lots of the fund come tax time.

  • GladRags

    Great read but I have one question about what you do after you make the TLH transaction in order to get back to your original asset allocation. Since you only keep large cap or total market funds and developed international funds in your brokerage account, this only really applies to this portion of the asset allocation. After the TLH waiting period do you then immediately start buying back into the original fund (such as back to the total market fund when you did a TLH and switched to SP 500 or went from developed International to All world ex US funds). Or do you mainly look at the overall allocation of 60% US and 22% outside US, so you just keep buying into the new funds until you see another chance to do a TLH and then switch back to the other fund?

    • Ronald

      I had a similar question too that was just about this. I am about to buy into more mutual funds (as I do every month when I add more funds) but should I continue to buy into the new fund I TLH’ed with or back into the original fund. I TLH’ed with Vanguard developed market to vanguard all-world ex US but now its past the 30 day period and I was thinking that all new funds should be directed back into the VAnguard developed fund again right?

      • Take your pick. There’s no wrong answer here as long as it’s been more than 30 days since you sold the losing lot(s).

        What I’ve done is gone back to the original fund for further investments. You may end up exchanging them for the 2nd fund in the future, anyway.

        Best,
        -PoF

  • Dave

    I’d like to start TLH in my brokerage account. Currently I have investments in my this account in VTSAX & VFIAX, as well as VTIAX and VFWAX in anticipation of doing so.

    However, I just re-looked at the 529 plans I have set up for my children, and in the aggressive growth portfolio they are invested in it contains Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares and Vanguard Total International Stock Index Fund Institutional Select Shares. I’ve currently got these 529’s set up for monthly auto-investments.

    Would you recommend not using VTSAX and VTIAX for TLH to avoid a potential wash sale? I’d like to keep a high percentage of my total investments in VTSAX so that would be a bummer. Plus if I’m using non VG funds there is a transaction fee to sell the funds. I guess if I stop auto investments and just lump sum contribute to the 529’s yearly I would have the option to TLH using VTSAX ~10 months out of the year, but that creates losses on time actively invested and has cash just sitting/growing in a savings account most of the year. I’d rather not try and move all 529’s to a different state/investment company to invest in non VG Stock accounts.

    Is there a better option? Appreciate your thoughts.

    • The same question came up at Bogleheads and no definitive answer was given. To me, a 529 seems different enough from an IRA that wash sales couldn’t result from investments there, but apparently some also consider this to be a gray area.

      The most conservative thing to do would be to move the 529s to different investments. It would probably be overkill, but that’s why I say “the most conservative.” You are also correct in that you could turn off auto-investment of dividends (if that’s an option in the 529) and lump sum invest a couple times a year.

      Or you could roll the dice and have duplication in your 529 and HSA like a lot of people probably do.

      Best,
      -PoF

  • Pingback: Tax Loss Harvesting with Fidelity: A Step by Step Guide - Physician on FIRE

  • Pingback: The Sunday Best (12/16/2018) - Physician on FIRE

  • Aaaaah! I am heartbroken that I’m only learning about tax loss harvesting now, and missed the bear market opportunity just a few months ago to lock in losses for years to come. Just thinking about this is making me sick.

    As other posters have said: Better late than never!

    Interestingly, I mentioned this to my CPA this year and she had no concept of tax loss harvesting.

    Thanks for this great post. I’m going to bookmark it and read it a few times.

  • Pingback: Know Your Enemy: Investing for Retirement - Physician on FIRE

  • Alicia

    I am a newbie at all of this, and don’t have enough money in Vanguard for it to really count yet, but I am trying to start learning so I can take advantage when possible. My question is this: I have my SE 401K, Roth IRAs, and 529s at EJ, and my husband’s 403b at TIAA-CREF. How in the world will I know if I am going to trigger a wash sale, i.e. what funds at Vanguard = what funds at EJ or TIAA? Everything is split into so many funds, I have no idea how I would follow it. Is my situation just too complex to deal with and effectively TLH?
    FYI My brother is an FA at EJ, so those funds are not moving for the time being.

  • Ray

    I do have a few questions re: tax Loss harvesting that I am having trouble figuring out:
    1) While harvesting etfs held for less than 61 days what is this issue re: qualified dividends becoming possibly unqualified that you have to worry about.
    2) is there a time to do this ie before or after dividends or it does not really matter with passive vanguard funds ?
    3) if selling international etfs like vwo or vxus is there something special as regards to timing in relation to dividends?

    Or am I sweating small stuff when all that matters is that I not do anything to trigger a wash sale.

    Thanks in advance

  • Sarah

    I am considering tax loss harvesting for the first time but my worry is that my spouse’s 401k is invested in Vanguard 2055 Lifecycle fund (it is the only low cost reasonable investing option his company offers). This fund includes: vanguard total stock market index fund and vanguard total international stock index fund as part of its make up and there isn’t a way to stop auto investment on his 401k, which happens every 2 weeks.
    Does this mean that I cannot tax loss harvest from our vanguard total stock market index fund and vanguard total international stock index funds in our brokerage account?

    Sarah

  • Scott Scharnhorst

    I’m trying to set up the 3 fund portfolio but scratching my head on what to put in my Backdoor ROTH IRA that wouldn’t complicate things. Would there be any issue holding a target date fund in the ROTH IRA since it will as a hole hold some of the similar funds like the Total Stock and Total International Stock funds that will be in the taxable account? The ratio of the target date fund is similar to my allocation

    • That would work if the goal is avoid any potential wash sale.

      • Scott Scharnhorst

        Thank you, I didn’t make it clear enough that I was referring to wash sales. I just read your post on the 3 fund portfolio and the details of wash sales, which was great. Could you clarify something for me, Do I only need to avoid the same funds between taxable and IRAs (roth or traditional) or do I need to also avoid any held in HSAs or 401ks?

        • Those two are gray areas. I personally avoid the possibility, but there is no clear guidance from the IRS.

          That’s another way of saying I haven’t come across any documented wash sales resulting from purchases in a 401(k) or HSA, but it’s easy enough to avoid, and so I don’t own anything in those accounts that I hold in taxable.

          Cheers!
          -PoF

  • Pingback: End Of The Year Financial Tips - Wealthy Mom MD

  • PJ-M

    I am wondering if it might be possible to “manufacture” a tax loss for a given year by purchasing an index ETF and the inverse of that ETF. An example would be QQQ and the inverse PSQ as a possible strategy. They seem to track each other without a lot of decay, unlike some of the 2x and 3x products. Regardless of what the markets do, you will end up with a loss that is actually offset by the second ETF as long as you are willing to hold on to the second ETF for a period of time.

    Has anyone done this or does it even seem to be a feasible strategy?

  • Melissa

    Though this post is a bit dated, I saw the link to this article on your Facebook group today so I hope it’s not too late to comment with a question.

    I’m curious how you keep track of these losses for the long-haul so that you know what is available to you come tax time. I presume Vanguard doesn’t know how much of the loss you “used up” in any given year, in which case there’d be no paperwork that comes from them to help you keep track.

    Do you have to keep a spreadsheet somewhere so you know what’s available to you to claim? What if you were to lose the spreadsheet/notes – would you have to manually go back thru all your tax returns to see what you TLH balance is?

    Also, since you’re financially savvy I’m assuming you do your own taxes, but perhaps that is not the case. If you use a CPA do they just keep track of what is carried over from year to year instead so you know your remaining balance for future years’ deductions?

    I hope my questions are clear!

    • There’s a worksheet on the 1040 (Schedule D) that tracks carryover losses. That’s how my CPA keeps track, but even if he were no longer in the picture, anyone could look at that tax return and continue to use those losses for years to come.

      Cheers!
      -PoF

Leave a Reply

Your email address will not be published. Required fields are marked *