Skip to content 
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 take advantage and do some tax loss harvest harvesting.
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 lost a million dollars in a few weeks back in 2020. I didn’t sweat it; it was a great tax loss harvesting opportunity, and we bounced back quickly.
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 screenshots to share with my audience.
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.
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 Investor Policy Statement 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 capital gains (if any) taken in the same calendar year. It’s a good way to avoid paying capital gains taxes on realized capital gains. These could come from selling stocks, mutual funds, or property.
Short-term losses will first cancel out short-term capital gains and long-term harvested losses will first eliminate realized long-term capital gains, but either type of loss can offset the opposite type of gain once the same type of gain has been fully canceled out.
Remaining losses will be deducted from ordinary income when you file your income taxes, up to $3,000 per year. When you use tax loss harvesting to offset taxable income, savings of $1,000 to $1,400 are typical for a high-income professional in a higher tax bracket.
Note: The $3,000 deduction can be taken by single filers and by married couples filing jointly. If you are married filing separately, the annual deduction can be up to $1,500 per return.
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 over $150,000 thus far in 2020, and those savings have the potential to continue to save me $1,300 or so per year for many 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.
Physicians and pharmacists, Register with Incrowd for the opportunity to earn easy money with quick "microsurveys" tailored to your specialty.
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 could 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.
The following are some decent trading partners. I’ve used Vanguard mutual funds and ETFs from the likes of Fidelity, Schwab, iShares, and others.
- 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.
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, I believe 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. This is definitely an issue for purchases in your spouse’s taxable account or any IRA he or she has, including a traditional IRA, SIMPLE IRA, or SEP IRA. 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.
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 you had sold. 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.
Here’s an overview of the TLH process in an infographic:
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 Empower, 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) were hard to come by for several years until March of 2020. This example came from a sharp drop after a relatively small investment, but I pulled the trigger to be able to capture the screen shots to share with you.
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 $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.
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.
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.
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.
PoF readers:
Tax Loss Harvesting with ETFs
There are pros and cons to using ETFs rather than mutual funds to tax loss harvest.
With ETFs, you’ll likely have many more trading partners to choose from. For example, on the Vanguard platform, can easily exchange one Vangaurd mutual fund for another Vanguard mutual fund, but I cannot exchange for a mutual fund from another broker.
I can, however, sell one ETF and buy another commission-free ETF from dozens of different companies. There are thousands of ETFs to choose from.
The main drawback of using ETFs is the inability to make a simultaneous exchange. You must sell one ETF in one transaction and buy another in a separate transaction.
If your brokerage allows you to use “unsettled funds” to purchase a new fund with the proceeds of the one you just sold, this is a minor issue. I have had no trouble doing so with Vanguard. However, if you had to wait for the funds to settle, you could miss out on a day or two of market action, and that could cost you.
Selling a mutual fund and buying an ETF to replace it can be similarly problematic. Your sale for the mutual fund will occur at the end of the trading day at the closing price. You won’t be able to use that money to purchase the ETF until the market opens the next day (unless you keep a sizable cash “slush fund” that you temporarily replete to make the transaction).
If after-hours market movement causes the ETF to close at a higher price than the previous day’s close, you’re going to lose money on the transaction, and that loss can be as much or more than the benefit of tax loss harvesting. Ask me how I know.
Conversely, you could get lucky and have the market open lower the following morning. In this case, you’ll benefit a bit when you get a little more for your money with the cash you harvested selling the mutual fund the day before.
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.
Over two weeks in March of 2020, I harvested an additional $148,000 in losses. While it would be better to have been out of the market completely rather than tax loss harvesting as the market plummeted, market performance can only be known in hindsight.
I used up some of these harvested losses to offset gains from the sale of a microbrewery that I had invested in years ago. I also had some lakefront property for sale that generated substantial long-term capital gains when sold, but I had more than enough losses to offset those gains. Again, any leftover losses will be carried over to be used in future years and can offset $3,000 of ordinary income annually.
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. For more tips on effective and simple tax loss harvesting, please read my Top 5 Tax Loss Harvesting Tips.
If you happen to be a Fidelity user, I’ve got a step-by-step guide for you, as well. Tax Loss Harvesting with Fidelity: A Step by Step Guide.
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!
247 thoughts on “Tax Loss Harvesting with Vanguard: A Step by Step Guide”
Thanks for the post. Regarding TLHing bonds, my muni bond fund is DFTIX, held at Vanguard. I want to TLH this fund, but it won’t let me exchange to VWITX b/c it’s a different fund family. I’m assuming to get around this and book the loss, I would sell the shares of DFTIX into my settlement fund and then simply purchase VWITX as soon as the funds become available. Am I correct?
Thanks in advance for your time.
Thanks for the post. Regarding TLHing bonds, my muni bond fund is DFTIX, held at Vanguard. I want to TLH this fund, but it won’t let me exchange to VWITX b/c it’s a different fund family. I’m assuming to get around this and book the loss, I would sell the shares of DFTIX into my settlement fund and then simply purchase VWITX as soon as the funds become available. Am I correct?
Thanks in advance for your time.
Great article! I have never tax loss harvested before as this is the first year I have invested in a taxable brokerage account (all my previous investments were with retirement accounts and real estate).
I have one question I hope you, or someone else in the community, might find the time to answer.
I was planning to sell of $6500 worth of VTSAX from my taxable brokerage in order to fund my Backdoor Roth in early 2023. I took the steps you mentioned of turning off manual dividends in my taxable and IRA accounts at Vanguard and switched my cost basis from average to Spec ID. So far so good.
All of my losing lots total well above the $6500 I had intended to move–a total of nearly $12,500. When you are doing your harvesting, do you liquidate all of the losing lots? Or just enough to hit some threshold (e.g. the $6500 I need or some sort of tax loss calculation number)?
I am thinking to liquidate all the losers, move the $6500 to my IRA for the Backdoor Roth conversion, and repurchase a partner within my taxable brokerage with the remaining $6000. My partner is going to be VFIAX within my Roth as well as my taxable brokerage (if applicable) for what it’s worth.
Thank you for your time
Great article! I have never tax loss harvested before as this is the first year I have invested in a taxable brokerage account (all my previous investments were with retirement accounts and real estate).
I have one question I hope you, or someone else in the community, might find the time to answer.
I was planning to sell of $6500 worth of VTSAX from my taxable brokerage in order to fund my Backdoor Roth in early 2023. I took the steps you mentioned of turning off manual dividends in my taxable and IRA accounts at Vanguard and switched my cost basis from average to Spec ID. So far so good.
All of my losing lots total well above the $6500 I had intended to move–a total of nearly $12,500. When you are doing your harvesting, do you liquidate all of the losing lots? Or just enough to hit some threshold (e.g. the $6500 I need or some sort of tax loss calculation number)?
I am thinking to liquidate all the losers, move the $6500 to my IRA for the Backdoor Roth conversion, and repurchase a partner within my taxable brokerage with the remaining $6000. My partner is going to be VFIAX within my Roth as well as my taxable brokerage (if applicable) for what it’s worth.
Thank you for your time
Your thinking is spot on. Follow your instincts; I would have suggested you do the same exact thing.
Cheers!
-PoF
I’m with Vanguard, and wanting to TLH in my brokerage account. However, it only gives me the Exchange option for my mutual funds – not my ETFs or individual stocks. Thoughts?
Hi Leif, if you’ve tax loss harvested on Vanguard recently, can you briefly explain how to do it with Vanguard’s new viewing format? I’m having difficulty following with the way Vanguard has slightly changed the appearance. Thank you.
I have not had any opportunities since Vanguard updated the look of the site, but I wouldn’t expect the process to vary much.
Wish I could be more helpful.
Cheers!
Leif
Physicians and pharmacists, Register with Incrowd for the opportunity to earn easy money with quick "microsurveys" tailored to your specialty.
For tax loss harvesting. To get into the minutiae here. If you have many tax lots of VTI, do you have to sell all of them at once and exchange for something else?
Or can you only sell the specific lots that you plan to claim losses on? Keep the rest. Assuming you don’t buy any more in the wash sale period.
What if you have a Vanguard Target date fund in your 401K? Do you need to sell that in order to tax loss harvest in your taxable account?
Only sell the red lots (those with losses). Be sure to have Specific ID set as your cost basis method.
A Target date fund is substantially different than VTI, so that should be a non-issue. A 401(k) in general is a gray area as to whether or not purchases there can cause a wash. In IRA, there’s definitely an issue, but it’s not known whether a 401(k) purchase could trigger one. But you don’t need to worry if what you have there is a target date fund.
Cheers!
-PoF
Regarding the wash rule with automated investing in a 403b…
If I sell a total stock market fund in my taxable, and my 403b has automated buying of s&p 500 plus extended market fund (and I do this at a 80/20 ratio meant to replicate the total stock market), is that also a gray area for a wash rule? Technically I am not buying the same asset, but I’m trying my darndest to replicate the TSM based on my 403b options
Thank you for all this! Ok, so I have stopped the reinvestments divs and I marked things as Specific ID over 30 days ago, and today I see a loss in my Vanguard International Index Fund Admiral. And yet:
-When I go to hit Exchange, the lots shown to me are all gains (from 2018-a few months ago). Do I need to wait until the beginning of the next month to see that losses occurred for this month?
-And, is it ok to automatically invest in that original fund as long as the divs aren’t being reinvested? During a TLH? And not during a TLH? I’ve seen conflicting yeses and nos to this, so I’d love to hear what you do.
Be sure you’re expanding the view to see the individual lots. If there’s an overall loss, you surely have individual lot or lots with losses.
Just do whatever you need to do to avoid buying back into the same fund within 30 days of selling it. I’ve never automated my purchases. I just make them once a month (at the most).
Best,
-PoF
Do you need to turn off automatic dividend reinvestments in advance? Or can you just turn it off for a month after you do the TLH sale?
Say I have 100k of VTSAX, and I get a dividend of $100 on June 15. Whether it’s automatic or manual, I assume you’d be buying back into VTSAX with that $100. Then if you want to TLH on July 1st, you’d need to sell that $100 specific lot anyways, right?
Thanks for the help
Could I do TLH with a TSM mutual fund and a SP500 ETF? For example, VTSAX with VTI?
Ideally I would like to TLH with VFIAX, however I do not have the funds to meet the $3k minimum contribution. Thank you!
Also, wouldn’t a wash sale be minuscule if I just left the dividend reinvestment on for the TSM mutual fund? Would it need extra tax paperwork if I did a partial wash sale that way?
Yes, you can absolutely do that.
Wash sales have to be reported to the IRS, and they undo at least some of the benefit of tax loss harvesting. I think best practice is to simply avoid them, which shouldn’t be difficult to do. Just manually reinvest the dividends 4x per year.
Best,
-PoF
Thank you for your blog. It is incredibly helpful and inspiring.
In a bear market, how do you decide for a certain fund whether to buy more of it versus TLH?
In this particular case, I’ve bought 7k of VSIAX over the past two months at the lower price, but reconsidering whether I should instead be TLH for the 13k loss the fund has incurred over the last two months. I understand if I TLH I would need to sell the lots I’ve bought in the past 30 days as well as all the losing lots, so it would not be a wash.
Is there a formula to compare the benefits of TLH of a given fund versus buying low?
What are your thoughts?
Thank you.
I don’t think you need a formula, necessarily. You can see the size of the loss you’ll be taking and as long as you remained invested (you could exchange VSIAX for small cap growth and/or value funds), you don’t actually lock in a true loss.
If you are in a position to buy, just buy more of whatever you exchange into.
Best,
-PoF
I understand how to TLH but am confused on the 6 month rule? I read about it on bogleheads where if you owned it less than 6 months or any share less than 6 then i need to fill out a form to characterize the loss. I’m lost on this part and did not see it in your post. Could you provide some insight on this?
Thank you!
Great post! I appreciate the vast detail and explanation. This is my first time TLHing and it all makes sense for the most part. I am just curious when I get to the step about exchanging a fund and am presented with the list of lots purchased, should I go through and manually select all of the lots that have a loss over the years that I’ve held the fund and just sell those? [Note I have held all shares for >30 days.] Then, as long as I do not purchase any more shares of this fund I am selling for >30 days I will not incur a wash sale, correct?
Yes, you can just sell only the lots that had a loss. In fact, that is what he does with his sale in the article. Just make sure any dividends go into your settlement fund and aren’t reinvested into the funds you are TLH. That could create a wash sale.
So I fixed that today to no longer automatically reinvest dividends and capital gains in my taxable account. However, I did have a dividend paid out and reinvested from one fund on 3/9 and another dividend to a different fund on 3/20. I know I need to wait 30 days on these to avoid the wash sale but do I need to wait 60 days from these dates when TLH to avoid being taxed at my ordinary income rates on these dividends?
If you have held the fund that paid the dividend for fewer than 60 days when you sell, the qualified dividends would be considered ordinary dividends. The tax treatment is less favorable, but you’re generally talking about a few dollars difference or dozens of dollars unless you’re trading multiple six-figures.
See this post for details (under heading Tax Loss Harvesting Time).
Best,
-PoF
Can you TLH municipal bonds? I bought VCLAX (CA exempt long term) and VMLTX (national limited term tax exempt) a week ago and since have tanked relatively speaking…
If yes, I am not sure what to exchange it for… I may just exchange for VOO and just wait a month and then re-purchase these bonds.
thanks
Dear POF,
Thank you for the step by step instructions!
I tried to “exchange” VTCLX into FSKAX at vanguard. But I could not add a fidelity fund in the “where is the money going” box.
Do I just place separate sell and buy orders? Do I have to wait a day for the proceeds of the sale to reach my settlement fund before I can buy? Or can I place both orders on the same day?
Thank you and stay well!!!
I haven’t tried to buy another company’s mutual funds on the Vanguard platform. With ETFs, it’s no problem.
This link may be helpful: https://investor.vanguard.com/other-funds/
My guess is that you cannot simply exchange, but may have to buy one after selling the other, meaning you’ll be out of the market in the interim. If the market continues to drop, you’d come out ahead in that scenario. But you could also miss out on a quick rebound in this volatile market.
Best,
-PoF
Hi POF,
Great article (and blog!) but I have a couple of questions:
1) I recently purchased 1 share of an ETF within the last 30 days but I have 100 shares of the same ETF (or sub. identical) which has incurred a loss (which I purchased from a year ago). If I were to sell the 100 shares, is it a wash sale which negates the loss for the entire 100 shares OR is it a partial wash sale where I can only take a loss for 99 shares (100 old shares – 1 new share)
2) Can I sell 2 (sub. identical or different) ETFs together for a loss, then buy only 1 (different) ETF for TLH? i.e. Sell $500 of VTI and $400 of VOO for a loss, and then buy $900 of VV?
1) Just sell all 101 shares. Alternatively, you can sell the 100 shares with the loss, keep the 1 share with the gain and have a partial wash sale. You would take the loss on 99 shares and the cost basis on the 1 share you keep would be adjusted. See my Top 5 TLH post for examples.
2) Yes. No problem as long as the one you buy is substantially different than everything you’ve sold in the last 31 days.
Happy Harvesting!
-PoF
Thanks for the reply, POF.
If the 1 share is also a loss and I sell all 101 shares, wouldn’t that trigger a wash sale since that 1 share is sub. identical to the 100 shares and it was purchased within 31 days prior to me selling all of it today?
Can you explain why the cost basis of the 1 share would be adjusted if it was purchased as a different lot? For example, if that 1 share was purchased at $100, why would that change if it’s untouched?
Yes, sell them all. THat’s what I’m telling you to do! If all have a loss, then the decision is that much easier. Just sell.
If you held on to a replacement share with gains, that would trigger a partial wash sale for one of the shares you sold. More info here: https://www.physicianonfire.com/tax-loss-harvesting-tips/
Best,
-PoF
Re: TLH,
To avoid a wash sale, in tax advantaged accounts like a 401K, should you also be mindful of the reinvested dividends in addition to new investments of current 401K accounts? I have an old 401K from my previous employer and there are reinvested dividends every quarter. It makes me wonder if I need to divert these dividends into to a “settlement account,” which I don’t recall ever seeing this option.
I don’t believe I have that option, either.
IF a 401(k) investment is a place where a wash sale can be caused by a purchase (it’s a gray area), then reinvestment of dividends are an issue.
The cleanest thing to do is not to own that asset class in the 401(k) if you TLH with it in taxable, but many people will tell you not to worry about it.
I talk a bit more about this in my Top 5 TLH Tips post: https://www.physicianonfire.com/tax-loss-harvesting-tips/
Cheers!
-PoF
Thx for checking …got in eventually with a different browser (did not work with chrome but worked with edge) …I was able to sneak a few trades. Thanks
Glad to hear it!
COVID-19 has brought some serious TLH season. Here’s a list of TLH partners for ETFs, that some may find useful:
https://physicianfinancebasics.com/tax-loss-harvesting-partners/
Great thanks for all the help…one last question since I have never done this…
let’s say I sell an ETF which I presume goes into my settlement fund … then are those unsettled funds available to buy another ETF immediately or is there a lag? Will vanguard let me buy another ETF with unsettled funds.
Thanks again
Yes- you can buy an ETF immediately with the unsettled funds. You will get an alert warning you of this. It says you cannot sell this new fund that you’re buying now before the trades settle. That means you cannot TLH this new fund in the following 48 hrs or so. You can go to your “Transactions” and see when the trade settles. Hope this helps!
ha….been trying all morning to TLH but vanguard says “cost basis info is not available at this time. Try again later.”
Oh, that’s terrible. I’m sorry to hear that.
I have never had an issue, but today was an extraordinary day.
Were you ever able to enter a trade today?
Best,
-PoF
Yes, today must’ve been a popular day at Vanguard. Glad you finally got in
Great thanks for all the help…one last question since I have never done this…
let’s say I sell an ETF which I presume goes into my settlement fund … then are those unsettled funds available to buy another ETF immediately or is there a lag? Will vanguard let me buy another ETF with unsettled funds.
Thanks agajn
Correct. It will go into the settlement fund and on the “balance and holdings” page under the Brokerage account to the right of your “settlement fund” it should say “funds available to trade.” As long as the funds are available to do it, you can trade. You will get prompt from Vanguard warning you about using unsettled funds, but just click OK.
Is there a step by step instruction for ETF’s? Mine is all pretty much in ETFs… If I understand this correctly…exchanges are not possible for ETFs? My cost basis screen for VTI and VXUS does not show exchange as an option….only buy or sell and when I try to sell there is no option to pick which lot to sell (unless its because the entire fund is down).
Also I have VNQ in my taxable account and the entire thing has taken a beating so was hoping to sell the whole thing and purchase VOO instead… am I missing something here?
I plan to allocate VNQ/VPU in my tax advantaged accounts..
Yes, you can do cost basis for Vanguard ETFs:
Go to “My Account” at the top and highlight >> Go to “cost basis” and click >> on the cost basis page you should see your “Name – Brokerage Account – Account number”; keep moving your eyes to the right and in small print you will see “view/change cost basis method”; Click it >>>Now you should be on the “View cost basis page”; here you should be able to change your cost basis unless you recently purchased a fund and it has not settled >>> change any fund you can from “FIFO” to “Spec ID”.
Now when you are trading ETFs, on the trading page where you Buy/Sell, when you enter the ETF you wish to sell, a “cost basis tab” should appear. It should be “order type” “duration” and then “COST BASIS” right above the “cancel/clear” tabs. In the “cost basis” tab, you can then click spec ID. As long as you aren’t selling all your ETFs for that fund, you should go to a second page when you click “continue” and there you select the funds you want to sell for losses.
Hope this helped. Wish I could post pictures.
thanks for the reply…. very helpful!
I think i got it…its a bit tricky, seems so much easier with mutual funds…
Also with ETF’s, since direct exchange is not an option….is the best option then to just choose the market rate option for both sell and buy?
As stated above I plan to sell all VXUS for VEU
And sell all VNQ and buy VOO
Can I buy MFs if I sell these ETFs (ex: VXUS – VFWAX)?
So, I would just sell at the “market” rate during these volatile times, and go a head and buy at the “market” rate for ETFs. This way their is no lag time. Although I believe it always prompts you regarding unsettled funds for purchases.
Regarding, ETFs to MFs, I’m not sure. You might not be able to use unsettled funds after selling your ETFs to purchase MFs. You might have to wait. The other thing with MFs, is the price of purchase won’t occur until the end of the day. Which could be higher.
Honestly, I love ETFs way more in this volatile market. Look at today how we started high, dropped, then bounced back in the afternoon. Had I been using MFs today when making purchases, I would have missed the opportunity to purchase mid-day at a lower price.
Same thing with TLH, I don’t have to wait to harvest at the end of the day. I sell and then buy.
I just stay with ETFs in my brokerage and Roth IRA these days.
homer: I am an ETf user, too.
Here is a step-by-step for ETFs: https://physicianfinancebasics.com/tax-loss-harvesting-with-etfs/
Hello
Thanks for the wonderful acrticle!
Do you know how to actually do the SPEC lot selling vanguard? My interface forces to you select a certain number of shares but no date. Anyone have a step by step on that within their desktop interface?
I already have SPEC enabled for all of my securities.
Thanks!
You should be shown each lot where you can see whether or not it has a loss or gain and when it was purchased.
In this example, I sold all, but if not, you can choose individual lots with a checkbox.
Best,
-PoF
Trying to TLH for the first time and I’m confused on the 30 day prior part of the wash sale. If I bought a lot of VXUS on Feb. 26 2020 can I TLH that now or do I need to wait 30 days?
Sell it anytime. The example in this post was held fewer than 30 days.
Best,
PoF
Hi! You wrote that you’d advise against trading a tax-efficient passive index fund for an actively managed fund that might spin off excessive capital gains.
My question: is vice versa (selling an actively managed fund for an index fund that I plan to hold long term) therefore a smart strategy? Are there any pitfalls in that approach to look for?
I would say yes. There are a few ways to “dispose of” funds you’d rather not hold in a taxable brokerage account, and harvesting losses is one of them. As far as pitfalls, the index fund might be very different from the actively managed fund, so the move could alter your assett allocation to some extent.
Best,
-PoF
POF,
With the recent economic downturn, I did some tax loss harvesting in my Vanguard taxable account. I sold some VTSAX and VTIAX only to realize that in my wife’s retirement account she has these same mutual funds but are labeled as a trust with lower expense ratios. Do you think I am subject to the wash rule since I am purchasing similar funds in my wife’s retirement account. The names and ER ratios are different but does that make a difference. Thank you for your help
Hi PoF,
Thank you very much for everything You do. I was trying to understand Back door Roth IRA for a longtime and finally was able to clearly understand the concept after reading your post on Google. Again TLH harvesting was another concept which I used to vaguely understand but you made it so clear and practical.
I have a quick question;
1. The fund I am selling, I understand I need to sell everything in the prior 30 days and dont buy anything next 30 days to prevent wash sale.
2. However the fund I am buying into, if I have purchased it in the prior 30 days, would that be a wash sale too.
3. Can I exchange to ETF to mutual fund as long as they are different classes
The reason I am asking is, recently I moved funds to Vanguard from Betterment. I want to consolidate all the betterment ETFs into couple of mutual funds, so it is easy to manage. I currently hold VTSAX / VFIAX at Vanguard that I invest in weekly basis.
So can I do the ETF exchange into my VTSAX/VFIAX ( which will be replacement fund and I am investing into it on regular basis) as long as they are in different classes.
Thanks again for your time.
VD
My gut says “no,” but you will find different opinions. Until the IRS issues specific guidance, the term “substantially identical” is open to interpretation.
I would exchange into the large cap fund to avoid the gray area, but that’s just me.
Best,
-PoF
PoF, one other question . . . is the burden now on your shoulders to ensure you are accurately keeping track of your 16 years’ worth of $3000 writeoffs, ensuring you don’t accidentally go over or mess it up? Or does TurboTax keep track of it for you, reminding you each year that you still have X dollars worth of writeoffs carried over from a prior year? Thanks!
The carryover worksheet on the 1040 tracks it. If all info is entered no properly, I would expect TurboTax to track it. I use a human CPA.
PoF, I’m a longtime reader but first-time poster. I love this article, so thank you kindly. Question . . . in your example, you clicked Submit when the loss was currently at $283 or so, but by the end of the trading day, the loss was even greater. That’s awesome. However, what if you’d clicked “Submit” and then the market rallied, closing at a *gain* for you by the end of the day. Your lot was a short-term lot, so you would have had a capital gain taxed at ordinary income tax rate, correct? The TLH would have tanked, unless I’m missing something? I’m just trying to learn more about it in preparation for my first time to TLH, based on the losses yesterday and today. Thanks!
That’s true, Casey. If you’re exchanging mutual funds, the later in the trading day you do it, the less likely that is to happen.
In this case, the lot I sold was down nearly 3% at the previous day’s close and was falling further. A late-day swing of more than 3% would be very unlikely.
The market closes at 4pm eastern time, so trading in the final hour generally gives you a good idea of where things will end up.
Cheers!
-PoF
Thanks, PoF! I’ll watch things today and put in the transfer order after 3pm if it still looks ripe for the picking.
Of course, it’s bouncing back a bit today… so far, anyway. I’m on Spain time so everything happens six hours later on my clock.
The market held out! I just clicked submit on my first TLH. 🙂 Thanks so much for the guidance and feedback.
Success! You lost money. 😉
But not really. Well, kinda… but with a silver lining.
Cheers!
-PoF
Question about avoiding a wash sale.
I’d like to exchange some VTSAX shares I recently purchased which are now at a loss for VFIAX which I hold in my taxable account for just this reason, to TLH.
However, three weeks ago I also purchased VTSAX in my i401K (the only other account I hold it in and only purchase in a few times yearly).
Does this preclude me from selling the recently purchased lots in the taxable account to TLH as it would trigger a wash sale if I don’t (which I wouldn’t) sell the recently purchased shares in the i401K? Or is it okay because I will not be purchasing any more VTSAX in any of the accounts in the next 30 days?
Thanks!
-Dave
Shares purchased in the previous 30 days can also create a partial wash sale. This is why I avoid holding the same funds elsewhere that I hold in taxable. I’m assuming you’re purchasing at least 4 times a year by reinvesting quarterly dividends plus the times that you make new contributions. It muddies the waters.
Some consider 401(k)s to be a gray area, and I don’t believe the IRS has made a clear cut ruling. It will be interesting to see if Vanguard flags it as a wash sale if you go through with it. Although, it’s what the IRS says, not Vangaurd, that matters.
Best,
-PoF
For your elections, I understand that you recommend NOT re-investing the dividends but rather transferring them to a settlement fund, but what are you doing with the option for capital gains? Are you re-investing capital gains or also transferring them to a settlement fund?
Thank you!
The index funds I own don’t typically distribute any capital gains, but I would do the same as I do with dividends.
Temporarily divert to the settlement fund and manually reinvest them in a fund that I haven’t TLH’d from in the last month.
Cheers!
-PoF
Thanks for the quick reply! Love your site and all that you do. It’s changed my financial life for better.
Cheers and Happy Thanksgiving!
I love hearing that. Happy Thanksgiving to you and yours!
We’ll be celebrating with some form of taco, I imagine (we’re in Mexico City).
Cheers!
-PoF
Knockout post. Can you write a similar article on tax gain harvesting with attention to god to prioritise and optimise choosing individual lots, preferably with vanguard but any platform is cool. Thanks!
I could do that.
The key is to try to get as close as possible to the top of the 0% capital gains bracket without going over. You need to do some precise tax planning at the end of the year.
Any surprises or forgotten income sources could foul things up, although you’d only owe tax on the overage — not all of the gains you take.
Cheers!
-PoF
Hello, thanks so much for this helpful post. When I tried to turn off dividend auto-reinvestment on my taxable account and IRA account via Vanguard, the site gave me these 2 options to choose from:
• Changing from “Reinvest” to “Transfer to settlement fund” will only apply to new purchases and will not impact your current holdings.
• To change dividend and capital gains elections on existing holdings, from the My Accounts dropdown, go to Account maintenance. Under Account profile, select Dividends/Capital gains elections and follow the instructions.
Question: to avoid triggering wash sale, could you please provide insight as to which bullet point (#1 or #2) did you take?
I currently have:
IRA: lump sum all at once into Vanguard Total Stock Market Index (VTSAX)
401(k) and Mega Backdoor Roth IRA: Fidelity 500 Index (FXAIX)
I wanted to buy VTSAX for taxable account (not within 30 days of lump sum IRA contribution) – if TLHing I plan to exchange it to Vanguard 500 Index (which is substantially different so it seems ok), but then switch back to VTSAX after 30 days. Within those 30 days, can I contribute to Fidelity 500 Index under Mega Backdoor Roth IRA without triggering wash sale? Thank you in advance for your insight.
You shouldn’t switch back unless the market continues to drop over that 30-day period. If the S&P 500 is up over the 30 days, you’ll cancel out some of the losses you just harvested by realizing capital gains.
It’s easier to avoid holding substantially identical funds in tax-advantaged accounts because auto-investments and auto-reinvestment of dividends (usually quarterly) can also wreak havoc on your plans to TLH.
Best,
-PoF
Knockout post. Can you write a similar article on tax gain harvesting with attention to god to prioritise and optimise choosing individual lots, preferably with vanguard but any platform is cool. Thanks!
Knockout post. Can you write a similar article on how to prioritise and optimise choosing individual lots for when you want to take profits , preferably with vanguard but any platform is cool. Thanks!
I have been tax loss harvesting for several years now and have enough losses for another 15 years @ $3,000 per year. My question is once I start receiving distributions from my 401k can the losses offset taxes I would pay on the distributions if the taxes are more than the $3,000 normally deducted prior to the distribution?
Nope. Carryover losses can offset any capital gains and up to $3,000 of ordinary income in a year, but no more. The 401(k) distributions are considered income.
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
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?
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.
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
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
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
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.
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.
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
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?
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
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.
Nope — you’ll get a form 1099-B from Vanguard summarizing the total long-term and short-term losses in January or February in the year after you take your paper losses.
There’s an example of mine in the post above.
Best,
-PoF
Thanks!
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
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
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
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.
correction above.
Loss is – $4,531.68.
Just sell all of it, including the recent purchase and you should be fine.
Happy Harvesting!
-PoF
Thanks again PoF. I just did my first TLH today.
Exchanged all VTSAX to VFIAX. Thanks.
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
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
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.
Thanks for the detailed post. Haven’t had the chance to use until today, since everything has gone up since I started investing. Harvested $3k in losses today.
I’m glad you could find a silver lining, Henry.
Interestingly I ran into exact the same issue you described in step 1. I sold VTSAX and VTIAX on Oct 26th, although I had purchased them only on Sep 18th. According to your explanation – and thank you so much for it! – it should not create a wash sale, since these were the exact lots I sold.
Vanguard now flags those as wash sales and I’m writing for and back to get this sorted out.
This was the first time I manually did TLH and of course was nervous about it. But you’ve done such a great job explaining it, that I finally went on and exchanged those funds for VFIAX (S&P500.)
Little shocker though that Vanguard does now flag these transactions and I really hope they will reverse their decision. Not sure what to tell them, expect replicating how you explained it.
If anyone has an idea – I would highly appreciate it!
It may be worth a call to Vanguard, or you can wait until you get your end-of-year paperwork from them and see how it plays out on your 1040. I’m guessing you’ll get the loss, irregardless of the Vanguard flag.
This thread may be helpful.
Best,
-PoF
PoF – Thank you for the link!
I finally had a phone conversation with a Vanguard rep. She was very interested in my point of view and we were able to clear the details.
Selling VTSAX did not create a wash sale, since I sold all shares I had acquired within the 30-day period.
The VTIAX sale on the other hand did create a partial wash sale. I had sold older shares (purchased in Jan and Feb), but at the same time purchased some within the 30-day window. I thought I had marked those for sale as well, but apparently I did not. So the error was on my side by not making sure all required tick boxes were marked.
At the end the tax impact was not that bad (about 180$ 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!
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.
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
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
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?
That would work. Just heed the advice to only TLH into something you’d be comfortable owning long-term.
Best,
-PoF
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
Thanks for the post. I’m about to do my first TLH.
I want to TLH vanguard devel int’l and buy total int’l. I did purchase shares 10/1 and 10/11. Can I sell those 2 lots as well as one lot back in June (total 3 lots)?
Also, want to TLH emerging market (same scenario as dev int’l) to Total Int’l. Can I do all this all in the same day?
Finally, I have intermediate muni-bond with Vg. What is a good TLC trading partner for that fund?
jibe – be in accord; agree
I only have total stock market in tax advanced account and 529 for my kids. could I create a wash sale if shares bought in 529 as well?
thanks
The IRS hasn’t ruled on any accounts other than IRAs, where you can definitely create a wash sale. I do like to avoid gray areas — this could be considered one, I suppose. If you want to be very conservative and 100% safe from anything that could possibly be considered a wash sale, don’t invest in a 529 by buying a substantially identical fund there within 30 days after a tax loss harvest. Seems unlikely to be an issue, though.
Best,
-PoF
Wow such an Excellent post, thanks for all of the details here.
You mention how you handle some of your tax advantaged accounts, does this include how you manage your 529s? Is there any risk for wash sales with 529 plans or are these generally exempted as the parents are not the beneficiary of the plan?
First post – Very good TLH info. Managing taxes is a large part of total returns over the long-haul.
Question – I have several long-term mutual funds that contain both “covered and non-covered” shares. Brokers are not required to report mutual fund cost basis info to the IRS for funds bought before 1/2012(non-covered shares), so they do not have any specific lot info on the website other than average cost. Could you expand on the impact of doing TLH with shares using the average cost method? (is the primary issue the loss of “picking and choosing” the largest loses) I was not wise enough to keep records of all those pre-2012 purchases, so is there anyway to re-create the cost-basis that the IRS will accept? I can sign it “scouts owner”, but I’m not sure how they deal with non-covered TLH reporting.
I’m also in this situation and having trouble finding information.
If you’ve got losses on funds purchased before 2012, those are some really lousy funds!
If you don’t have any records or receipts in your files that show the cost basis, and the broker is unable to provide the info, you may just have to take the average cost as your basis.
Best,
-PoF
I can’t believe I haven’t seen this post before. The amount of work and detail that goes to your post is inhuman. Thanks for the step by step guide. My reaction is usually the second one after a correction or a dip. It will eventually come back up. Keep a steady and strong hand not to panic sell.
Tax loss harvesting is one part of investing that is just difficult for me to grasp.
This is the main reason I plan to use Wealthfront for taxable.
My question is, how can you synchronize the tax loss harvesting if I have a taxable account with a roboadvisor and Roth in vanguard? I feel the risk of wash sale is very high.
That’s one of the reasons I haven’t been too keen on roboadvisors — I’ve never gotten a satisfactory answer other than “we look at all of the accounts we manage.”
The longer answer is you should be able to look at all the ETFs the roboadvisor is holding and you may be able to avoid holding them (or their mutual fund equivalents) in your Roth or other tax-advantaged accounts.
Cheers!
-PoF
Better late than never! Great to have these post ready to when things go south in the market. Twitter has been blown up by people panicking during the correction due to a variety of reasons. It doesn’t help that leading up to this correction the media and YouTube spread fud for ratings and views. I think the ratio of good news to bad needs to be 5:1 to be effective, so this post 4 more times and then maybe the silver lining can be seen. I love the panel you were on with MMM, and he commented on Stock market corrections. I believe he said something like, “I love them, it’s like going to a sale!” He blew the guys mind who asked the question. Priceless?
Hi!
I sold a Total stock market bond index fund with a 3000 capital loss in my Brokerage account (I know, it was dumb to have bonds in Brokerage and that is why I sold them).
I just realized that around the same time in my other 403 and 457 accounts there were some shares bought of another similar or the same bond index fund from dividend reinvestment. The total dividend reinvestment was around 300.
Does this mean that I can still claim 2700 capital loss?
Thanks!
Carlos
Yes — that would be partial wash sale. That’s why it’s ideal to avoid holding funds that you have in a brokerage account in any of your other accounts. But you still get to take most of that loss, and since the accounts are probably not connected in any way, it’s probably up to you to to report the wash sale.
Best,
-PoF
I have VTSAX in my 403b and my taxable account.
I will no longer contribute to VTSAX in my 403b but instead VMCIX and VSMAX
My question is should I convert all the VTSAX in my 403b to VMCIX and VSMAX or just keep what’s there and make sure no dividends are reinvested into VTSAX in the future to avoid wash sales?
That would be the safest play. There is some debate as to whether or not wash sales can be created from 403(b) and 401(k) investments / reinvestment. I choose to avoid such gray areas when it’s easy enough to do.
Best,
-PoF
Both are viable options as long as you’re actually able to set up the 403(b) not to reinvest the dividends back into VTSAX (and your future contributions aren’t going to VTSAX).
thank you for both responses, I’m having difficulty figuring out if I can avoid dividend reinvestment with my 403b and am waiting on a response from the plan administrator. I really appreciate your help.
My guess is “no,” but I’ll be interested to hear.
I called my 403b plan administrator (Fidelity) and I was told that I cannot change how dividends get distributed (reinvested versus putting into a money market fund) inside tax-sheltered accounts. I was able to do it on the Brokerage account and Roth IRA but I was told I could not do it inside the 457b, 401a, and 403b plans.
They also told me that for the purposes of tax-loss harvesting, I needed not to worry about tax-sheltered accounts with regards to wash sales.
That’s not uncommon (the inability to direct dividends in a retirement account).
The last statement is false. You absolutely need to worry about wash sales with some tax-sheltered accounts (IRA and spouse’s IRA). The IRS has not clarified whether or not workplace retirement accounts can create wash sales. I like Mike Piper’s take here:
“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.”
Best,
-PoF
You mentioned you also use Personal Capital. Is it possible to monitor for tax loss harvesting opportunities in that program? I don’t see a way to monitor spec ID holdings through PC. If it is possible that would be much more convenient for me as at the current time I am having to log into Vanguard to periodically check the holdings in my taxable account. Thanks so much.
I don’t belive Personal Capital tracks individual lots, so you’ll still have to log into Vanguard or keep a spreadsheet with your cost basis to check.
Best,
-PoF
Thank you so much for this great resource. I’ve had no problem wrapping my head around the concept, trying to work through the execution was the confusing part. You have made short work of that application – thank you again!
I want to set this up to start taking advantage of this while hopefully avoiding any pitfalls.
For the past few years, I’ve made new contributions only to my tax-advantaged accounts.
New money coming into my taxable accounts has consisted only of quarterly contributions from dividend payments.
In short, I guess this means most shares sold as a loss, will have been held long term. Provided that I pick a date and make no new contributions within 30 days of that date – and as long as I can identify the cost basis of those shares – do you see other issues here? Thank you!
I don’t see any issues. To ensure no issues with wash sales, have those dividends sent to a money market fund (or cash) and reinvest manually into something that you have not TLH’d into in the last 30 days (and don’t expect to in the next 30 days).
Cheers!
-PoF
Nice informative post.
I tried some TLH for the first time last week. I was working late on 4/2, which I think was one of two days last week with large losses in the market. When I logged on to my brokerage account I had some short-term losses of about $1000, so I put in some exchange orders the following day when I got home from work prior to market close. For example, I traded out VTSAX for VFIAX. At that point on 4/3 (I think) the market was up a little, but then when I looked the following day the market had a strong rally in the last hour it was open. I still managed to eek out a short-term loss of $300, but I realized this could easily resulted in me generating a short-term capital gain which would stupid. Aside from just waiting to TLH until you have a larger capital loss and/or using ETFs rather than mutual funds (which can only trade at the end of the day) any other suggestions for avoiding having your capital loss turn into an inadvertent capital gain?
Also, I considered trading VTSAX for Schwab Total Stock Market Fund, but I wasn’t able to make this via the exchange function on Vanguard. It appeared that I would need to sell VTSAX and then buy Schwab Total Stock Market Fund I assume a day or two later once those funds were available. Has that been your experience doing TLH with Vanguard is that trading from a mutual fund to ETF or non-Vanguard fund requires the buy-sell function rather than exchange function? Am I correct that the buy-sell function takes you out of the market for a day or two?
I believe that is the case, unfortunately. I have not invested in any ETFs, so I can’t say from experience, though.
Best,
-PoF
I tried to change the options for the capital gains and dividends in my vanguard account to be transferred to a money market account at vanguard. However i got a message that i have to meet the minimum balance of $3000 for the money market fund to be able to transfer the capital gains and dividends into that account.
Has anyone else had to deal with this situation?
When i called vanguard, they suggested upgrading my account to a brokerage account at vanguard which then allows you to transfer money to a money market without any minimum balance requirements (i am told my current account is only a mutual fund account and not a brokerage account)
do you have any suggestions to deal with this situation? are there any drawbacks of upgrading the account to brokerage? does it change anything? Vanguard said there are no additional fees for it
thanks
You can open the money market fund with $3,000 cash, then promptly deplete it to a dollar by investing $2,999 into an existing mutual fund. That’s what I did in a mutual fund account.
I have both a mutual fund account that holds 99% of my taxable investments at Vanguard and a separate brokerage account with the BRK.B. You can “upgrade” to a merged account — details here.
Cheers!
-PoF
Hi PoF –
My question is about your mention:
“I have both a mutual fund account that holds 99% of my taxable investments at Vanguard and …”.
As you know, Vanguard now recommends brokerage accounts in almost all circumstances. I don’t think that they even mention mutual fund only accounts on their website any longer. You have to call them to set one up. Having said that, I understand the simplicity of having a mutual fund only account, particularly for a minor who will not be buying stocks or bonds and will never need margin. My understanding, however, is that you need a broker account to get the free $500,000 SIPC insurance per account. SIPC insurance does not cover the investor for investment loss, e.g. a mutual fund holding crashing due to its concentration in a handful of speculative or even fraudulent stocks. SIPC insurance does provide protection if securities or cash are missing from the brokerage account such has happens with malfeasance, fraud or bankruptcy of the broker-dealer, such as Vanguard or Fidelity. This is unlikely, but people thought that Bernie Madoff, Lehman Brothers and Bear Stearns accounts were solid and would last forever. Madoff was a former Chairman of the NASDAQ. SIPC insurance kicked in after his fraud was exposed and made good on $500,000 on most accounts. (I don’t know the exact rules.)
So isn’t there an advantage to converting from mutual fund only accounts to brokerage accounts? To stay out of trouble, they could be set up as cash only (no margin), no options allowed. No one says that the investor has to buy individual stocks.
https://www.sipc.org/for-investors/what-sipc-protects
“Most customers of failed brokerage firms when assets are missing from customer accounts are protected. ”
https://www.sipc.org/news-and-media/news-releases/20140505.html
https://www.sipc.org/news-and-media/news-releases/20140325
“Following the anticipated fourth distribution, 1,129 accounts will be fully satisfied out of the 2,189 accounts with 2,517 claims allowed by Trustee Picard. Each allowed claim in the amount of $925,000 or less will be fully satisfied. The remainder of allowed claims will have seen 46.036 percent of their claim amount returned from the funds recovered by the Trustee plus the SIPC advance of up to $500,000.”
Interesting, GH. Thank you for bringing this issue to light. I’m not familiar with SIPC insurance, so I’ve got some homework to do. It seems odd that different account types would have different coverage.
I’ll run it by a Flagship rep and see what they say.
Best,
-PoF
Doc,
I don’t understand your comments regarding TLH with IRA’s and Roth IRA’s. You make similar comments about “tax advantaged accounts”, which generally refers to IRA’s, Roth IRA’s and 401-K’s. All of these are either tax free (Roth’s) or task deferred (non Roth IRA’s or 401-K’s), but in any case they incur no capital gains or capital losses ever, not while held, withdrawn or liquidated. So TLH is not applicable to any IRA or 401-K, Roth or otherwise. Wash sales are also irrelevant. Your brokerage statement won’t even report the cost basis. Vanguard certainly doesn’t, because it has no relevance. Am I missing something? Why are you talking about TLH and wash sales with respect to these tax advantage accounts?
Good question, but what I’ve said is true. You cannot sell an asset in a taxable account and purchase substantially identical replacement shares in any other account owned by you our your spouse. That would constitute a wash sale.
Now, whether or not anyone would notice is another story, but the fact that it’s a wash sale is not a gray area. More from Schwab on the subject:
“Q: What would happen if I sold a security at a loss in a taxable account and then immediately repurchased it in a retirement account, such as an IRA?
The IRS has ruled (Rev. Rul. 2008-5) that when an individual sells a security at a loss and then repurchases that security in their (or their spouses’) IRA within 30 days before or after the sale, that loss will be subject to the wash-sale rules.”
Best,
-PoF
how would IRS see the spouse trigger wash sale given most brokerage won’t report it? is it a manually check?
They would likely only see it in the event of an audit. There are many ways to create a wash sale that only you will see. It’s up to you to report it as such.
It’s similar to having a cash business. It’s up to you to report your earnings and pay taxes on them.
Best,
-PoF
Doc,
TLH and other ideas you present can be advantageous, but they are not sure things or free money. They can sometimes be disadvantageous. For instance, if I generate a short term capital gain with TLH, I am decreasing the cost basis on my subsequent investment. This will ultimately increase/decrease my eventual capital gain/loss and thus eventual taxable income. It is true that it is generally better to defer a gain, especially if we can establish a long term gain, but not always since we don’t know what our tax rate will be in the future, especially when the capital gains rates change and our income bracket changes. If I get a great job in the future, my future long term capital gains rate could easily exceed my present short term capital loss rate, especially if IRS rates increase across the board. We might also move from a low or no income tax state to a higher income tax state. A larger capital gain in the future could push a retired investor above an income threshold which raises Medicare premiums and a threshold which increases taxes on Social Security benefits.
Also, an exchange to a new mutual funds results in sitting out the market for one day. For ETF’s or stocks, it’s 3 days. In a good market, that will result in missing out on the days’ gains. It’s the same story with your strategy of stockpiling dividends until the end of the quarter. In rising markets as in the last 9 years, this strategy left your dividends uninvested and missing gains for between 1 and 90 days, a long time, before reinvestment. Have you ever calculated the missed gains and compared it to the taxes saved?
My point is that one can always describe strategies that worked in specific circumstances in the past, but it doesn’t mean that they will work in most or all circumstances in an uncertain future where market performance, tax rates, tax brackets and rules change. Many people made decisions based on the assumption that mortgage interest and state and local taxes would always be fully deductible.
Thank you for the comments, Garth. I agree that one should not tax loss harvest without giving a thought to your financial future. It should be part of a larger plan that considers your current and possible future capital gains bracket, state income tax bracket, and charitable giving.
I will quibble with a couple points you made, though. Using mutual funds, I don’t sit out a day in the market. That could erase any benefit I would see from a TLH event. When exchanging with Vanguard, one fund is sold at the end of the trading day price, and you now own the fund you exchanged into when the market opens the next morning.
Also, I don’t accumulate dividends in money market fund. Again, that would be sitting on cash unnecessarily. Next week, dividends will hit my money market fund, and I’ll invest them in one fund of my choosing. That ~0.5% of my taxable account may be in cash for a couple days, but that’s a small sliver of the portfolio, and it’s certainly not in cash for 90 days.
Personally, I’m in a high-tax state, expect my taxable income to drop substantially in retirement, and will likely be moving to a lower income-tax state. I donate the lowest basis shares (i.e. lots with the highest percentage gains) in my taxable account to a donor-advised fund, and there are other ways to eliminate capital gains, such as the step up in cost basis at death.
You do make some good points about understanding your own situation before blindly tax loss harvesting, but you also need to be careful with making assumptions. Thank you for sharing your insight.
Best,
-PoF
PoF
newbie here. I have about 100K-150K total that is sitting in my Vanguard money market and fidelity checking account. After reading some of the blogs, I need to move the money to taxable accounts like
Vangaurd total stock market VTSAX
500 infex fund VFIAx
Q1. what do you recommend, that will also facilitate tax loss harvesting?
Q2. Also should I use about 20K of that money to establish the backdoor Roth IRA for 2017 and 2018 ( mine and spouse)?
I have never done the backdoor Roth.
Q3. should i continue to keep my 15-20K emergency fund in the money market/checking account vs investing account and moving it to checking account when I need it?
Greatly appreciate all your advice and suggestions!
PoF
newbie here. I have about 100K-150K total that is sitting in my Vanguard money market and fidelity checking account. After reading some of the blogs, I need to move the money to taxable accounts like
Vangaurd total stock market VTSAX
500 infex fund VFIAx
Q1. what do you recommend, that will also facilitate tax loss harvesting?
Q2. Also should I use about 20K of that money to establish the backdoor ROTH for 2017 and 2018 ( mine and spouse)?
I have never done the backdoor Roth.
Q3. Also should i continue to keep my 15-20K emergency fund in the money market/checking acount vs investing acount and moving it to checking aount when I need it?
Greatly appreciate all your advice and suggestions!
Trying to understand TLH for the first time.
1. If yo incur loss in your VTSAX account lets say, do you have to swap ALL of your money in VTSAX into another fund family?
2. Also, after 30 days of pulling TLH, can you go back into VTSAX from the new fund you got into for TLH?
Thanks!
1. No! Only the lots in the red (those that have a loss). That’s why Specific Identification of individual lots is important.
2. Yes, but I wouldn’t unless the new fund has had no gain. If it has gained nothing, you’re fine to switch the back. You’re only out the transaction fees, which for me is zero in Vanguard mutual funds.
I advise exchanging into a fund you’d be holding indefinitely.
Cheers!
-PoF
This is the aspect of TLH that confuses me the most. Using your example, a “Three Fund Portfolio” would by necessity have to become a 4 or 5 Fund to have somewhere to put your losses? What happens down the road if the replacement fund shows losses of its own? Does this become a game of ping pong selling from one and buying into the other back and forth?
Please clarify three points:
1) If I am implementing a TLH in my taxable brokerage account and have identical mutual funds in a tax efficient brokerage account (ie Roth) with either periodic purchases or dividend reinvestments, could this create a wash?
2) Remind me how short and long term losses may be applied? In your summary section, you state that in 2016 you had $6,212.57 in long term losses and $39,236.58 in short term losses. Can both short and long term losses be applied against ordinary income (limited to $3000 per year)? Can short term losses be applied against long term gains and vice versa?
3) Would the same strategy work with ETFs? If so, do you prefer mutual funds or is there an advantage?
Sharing the following answers for 1 and 2.
PoF, I am still interested in your perspective on TLH w/ index mutual funds verses index ETFs. Is there an advantage to one vs the other? Thanks.
1) From Charles Schwab web site:
2) From Turbo Tax web site:
I’m glad you found good answers to the first two questions.
To answer #3, the strategy works just as well with ETFs. Just note that most people would consider the ETF version of a mutual fund to be substantially identical, so don’t try to harvest VTSAX and buy VTI or vice versa.
I don’t own ETFs, so the mechanics of buying and selling may look a bit different. I recall WCI talking about how he had to wait for some funds to appear in the settlement fund before they were available to purchase the next ETF when he did it. That’s a non-issue with Vanguard mutual funds, and may be a non-issue with ETFs depending on the brokerage.
Best,
-PoF
POF,
thanks for making this. I shared it with a colleague at work as well.
Its a good concept, the question I have is in the above example you cannot purchase VTSAX for 30 days after this exchange, what if during those 30 days you have a solid rise, are you missing out on the “potential” to fully capture return from those funds?
Hi PoF,
We need a 2nd opinion. We’re planning to TLH total domestic & large cap . We currently use the 3 fund portfolio with some accounts approximating the total domestic stock. The funds are scattered in different accounts with the amounts below. Our current & desired AA is 80/20 stock to bond (56% Domestic / 24% Intl / 20% Bond). Given the amounts below, is it advisable to switch all our current total domestic stock and large cap funds in our tax-advantaged accounts (401k, 403b, 457b, 2 Roth IRAs, 2 HSAs) to small and mid-cap funds? If we do this, is the tilt towards small/mid cap too big and ,if it is, is that a bad thing? What should be the ratio of small to mid cap (I saw yours to be around 50/50). I will list the choice of available small and mid cap funds (in parenthesis) beside the total stock/large cap. Also in our HSA, which small and mid cap funds should we use (VMVAX and VSIAX since you like value funds?)
We appreciate any input. Thanks so much!!!
Taxable
VTSAX: 428,118
VTIAX: 342,282
401k
VITPX: 229,022 (VSIAX)
VBXMPX: 64,451
403b
VINIX: 19,226 (VMCIX, VSCIX)
VMCIX: 886
VSCIX: 3,447
VBTIX: 149,336
457b
VINIX: 14,311 (VMCIX, VSCIX)
VMCIX: 699
VSCIX: 2,632
VBTIX: 66,066
Roth 1
VTSAX: 40,179 (VSIAX, VMVAX)
Roth 2
VTSAX: 33,003 (VSIAX, VMVAX)
HSA 1
VIIIX: 27,026 (VEMPX,VMVAX,VSMAX, VSIAX)
VEMPX: 6,646
HSA 2
VIIIX: 3,200 (VEMPX,VMVAX,VSMAX, VSIAX)
VEMPX: 764
Thanks for the step-by-step explanation. I use Wealthfront for my taxable accounts, and considering whether or not to just move it all to Vanguard and DIY everything. This post definitely helps to explain the how-to.
Like other comments have mentioned, the idea of turning off DRIP is about as appealing as my morning commutes in rush-hour traffic. Not to mention that after executing a TLH event, I would also need to appropriately adjust automated investing for the following 30 days (if I’m understanding this correctly). But having used Wealthfront basically since they released, I’ve become a big fan of TLH, just not a fan of paying the fee.
One of the beefs I have with the roboadvisors’ automated TLH is that they won’t consider the activity in other accounts you own, like a 401(k). It’s up to you to avoid wash sales there, so you have to do a certain amount of work, anyway, but if you don’t know what they’re harvesting and when, how are you to avoid a wash sale? Most likely, they’re happening all the time, but no one’s paying attention and catching them.
I haven’t exactly turned the DRIP off, but all of the reinvestments go to the Vanguard money market fund. I do manually reinvest from there four times a year. I’m typically manually investing 12 times a year anyway (I rebalance with new additions so I don’t like automated investments). Really not a big deal.
Best,
-PoF
I want you to prove me wrong. Those of a certain age will remember a short film called Bambi Meets Godzilla. (1969 on YouTube). I have a great W-2 income. I bought individual Oil Company
Stocks In 2013 and held on (on advice of my CFP) from $10000 to $1000 by 2016, losing 9k. I put on Schedule D as a $3000 loss last year and the IRS calls them “disallowed losses” because of the AMT. Am I correct? Does the AMT negate TLH? Hopefully 2018 will be different for the AMT. Thanks.
The IRS said that?
I’ve paid the AMT pretty much every year since I’ve been an attending and have never had an issue with TLH. Fairmark seems to confirm this here.
Far fewer people will be subject to the AMT in 2018, but I would not think your recent loss should be disallowed. You may want to consult a CPA to help you fight the IRS on it.
Best,
-PoF
p.s. I’ve never heard of Bambi Meets Godzilla but it sounds awesome!
I did the same TLH last year and have a similar form as above – Do you know what the difference is between form 8949:A and 8949:B on your TLH summary above? Do you total the two sums for your total for TLH?
How do you keep track of multiple years of tax loss harvesting totals and what you have already used for your taxes?
Do you have a good trading partner for Vanguard REIT (VGSLX) or vanguard emerging markets (VEMAX)?
Hello DocMatt,
There’s a Capital Loss Carryover Worksheet that tracks short-term and long-term capital losses separately.
You don’t want to look for a similar trading partner for the REIT fund. If you have a loss there, or it’s close to even, I’d sell it all and repurchase in a tax-advantaged account (I own VGSLX in Roth). It’s a very tax-inefficient asset class with the dividends it doles out. Ditch it while you can!
For the Emerging Markets, I’d look for a different broker’s emerging markets fund. Just be sure they’re not following the exact same index. Morningstar can help you find such a fund.
I’m traveling for a few weeks and don’t have access to my 1040, so I can’t answer the 8949 question. I use the services of a CPA to file my income taxes, so I’m not as well versed as the do-it-yourselfers with the various forms.
I hope that helps a bit.
Best,
-PoF
I use HR block tax software, which automatically tracks the TLH totals as you book losses. TLH in the old days was a total excel accounting PITA but now with brokerages marking basis, gains, and losses in lots and with good tax software it’s much easier.
Part of the accumulation strategy might be to ladder your purchases monthly
Thanks for the excellent detail. I’ve never really considered doing this before, but maybe it’s time to start.
Just curious… Say I have a few balanced funds in taxable where the dividends are reinvested and the default cost basis method is configured. If I wanted to start tax loss harvesting, would it be better to update the current fund configurations, or to exchange the funds for different ones (which would trigger a taxable event) and configure those for TLH? Or does it just depend on the impact of the taxable event?
I don’t have all the information to give a definitive answer, Rybo, but I suspect the right answer will be to keep what you’ve got and change the cost basis from the default (avg cost) to Specific ID.
It only takes a minute to do, and all brokerages have been required to track the cost basis for you since about 2011.
Cheers!
-PoF
Thank you!
Destined to become another one of your reference posts along the lines of your backdoor Roth post, PoF. Thanks for the public service!
Unfortunately it’s not a strategy that would work well for us as we play the five fund strategy and the amounts are tilted too heavily towards tax advantages accounts to allow splitting types of stocks by account. The few individual stocks we hold are currently way in the money.
That being said even if you don’t tax loss harvest wash sales can come into play. I have a few grants of company stock that stagger release on the last few months of the year. I generally don’t hold them all to sell together as that can mean holding a decent amount of company stock for a month. The second trigger of RSU will thus always trigger a wash sale. Thankfully it carries over to the next sale in cost basis though it is a pain to report.
Awesome, and thanks! I love PoF Screenshot Tutorials®.
Your TLH trading partner funds are already well funded. If I don’t already have my trading partner funds setup with healthy balances, should that be done first? I see me running into a problem if I want to TLH $1,700 but don’t already have a fund set up with at least the $3k minimum to trade into. Is that right?
Thanks again!
In that case, Toby, I’d look at the ETF versions of the funds. There’s no minimum and the expense ratios are generally the same as the admiral funds. You could also look at a different fund family (like Schwab for example) that also has lower or non-existent minimums.
Cheers!
-PoF
What about spouses and their holdings with regards to wash sale if you file married jointly? For example if you sell VTSAX and then your spouse acquires the same within 30 days as part of regular 401(k) contribution, would that trigger a wash sale? I’ve heard a few different thoughts on this.
@Texancoqui spousal accounts are treated just like they are your own. So there’s no selling VTSAX in your account and buying it in your spouse’s: it will trigger a wash sale. The scenario you describe would trigger a wash sale.
The issue with spousal accounts has been the limiting factor for me. While I don’t mind tinkering with my retirement account to avoid wash sales, having my wife change her tax-deferred asset allocation solely for the sake for tax-loss harvesting on my taxable account seems too much of a hassle.
Has this been an obstacle for anyone else trying to do tax-loss harvesting? Anyone have any suggestions for getting around this? Thanks, POF for another very helpful post.
I had never considered that automated investments could trigger a wash sale. Great post, as usual, Doc. And, you taught this old dog something new today. Always something to be said for that!
I learned the hard way, Fritz. Glad you could learn from my mistake!
-PoF
Extremely helpful post! I had a vague idea of what TLH was, but now I fully understand it. I checked my taxable account and don’t have anything I can sell at a loss after major rearranging of my allocations last year. I’m happy to say I can now monitor things when the market dips and be ready to get some juicy TLH going. Thank you!
The more often you invest, the more likely you are to see small opportunities like the one I described here. A major downturn (bear market) may bring about losses in funds you’ve held for quite some time.
Cheers!
-PoF
Great article and very timely. I just TLCed for the first time a few days ago to the tune of about $1500. This would have made it easier.
Welcome to the club!
Fantastic post! Now will you unpack how to use your losses to offset/lock-in capital gains? ?
I’d rather use those losses to offset ordinary income, which is taxed at a significantly higher rate. However, I’ll probably be forced to use many of my carryover losses from 2015 & 2016 to offset some significant capital gains when we sell our second home, which could happen as soon as this year or next.
Good question, though.
Cheers!
-PoF
So when you are TLH and you have ore than $3000 a year say. How do you do carryover losses? Vanguard will send the 1099-B with loss and gain for the year, I will enter into turbo tax and that’s good for a year, but will it continue to show up for losses year after year if say I harvested $15,000? Is there anything I have to do to “carryover the losses” manually when I do taxes, or will it be on future 1099-Bs?
Vanguard will NOT record carrover losses because Vanguard has no idea what you reported across the board for capital gains and losses.
Your tax return should include a Capital Loss Carryover Worksheet that you or your tax preparer will use to carry those losses forward to future years.
Best,
-PoF
Thanks man. Great summary and am tempted to try it tonight!
Pure gold, my friend.
Love these step by step posts. We are opening a taxable account this year at Vanguard.
Unfortunately I read this today and did my trade yesterday, not knowing I need to switch to SpecID. I did everything else correctly. Does that mean I cannot TLH?
You can still TLH, but the cost basis you sold at will be the average acquisition cost of all lots you bought of that particular fund.
Ideally, you would sell the losers and keep the winners (assuming they weren’t purchased in the last 30 days).
I hope that helps clear things up. You might want to log in now and set your cost basis in all of your funds to Specific ID. Shouldn’t take more than a few minutes.
Cheers!
-PoF
Hoping this is somewhat similar to the question above. I came across this post a couple of weeks ago (too late for 2018, but 2019 is shaping up to be a good year for TLH…), and I immediately switched my cost basis in Vanguard from average cost to SpecID AND turned off automatic reinvesting of dividends.
Holding VFIAX and VTSAX in a taxable account, all purchased since 2013. When Vanguard made the change, VTSAX looks good, but VFIAX shows the same cost basis across all lots. I asked Vanguard about this, and they explained that since I had transferred some shares of VFIAX in December 2017 (to a donor-advised fund) and hadn’t moved to SpecID by then, they used average cost AND they continued to use average cost for whatever dividends were reinvested in 2018. Anything going forward, however, should use SpecID.
Does this sound right? Any way to retroactively make a switch? Locks me in at a fairly low average cost and makes TLH harder unless the stock market has a serious downturn this year.
Does it matter whether it is short or long-term capital losses?
I think long term losses would be harder to find. In PoF’s case, he used very short term losses, as in just a few days prior.
Great post!!! What an awesome resource. I am still a little confused on purchases made 30 days prior to TLH. For example, I have bought VTSAX on 1/9/18 that has lost $500, but also additional purchases on 2/8/18 that has gained $97. Could I sell only the 1/9/18 and keep the 2/8/18 lot? Or do I need to wait an additional 30 days? Thanks
You’ve got to sell both lots. The 2/8 lot would be considered “replacement shares.”
Essentially, the financial outcome for selling them or not selling them is the same. But if you sell them, there will be no wash sale to report.
Best,
-PoF
So basically you have to sell any lots bought within 30 days of each other, or within 30 days of the most recent purchase?
Yes, if you take a loss, sell all identical assets purchased within the last 30 days.
Personally, I only invest once a month in taxable. I like to decide which asset class gets the monthly investment (that’s how I typically rebalance), so I don’t have any automated investments. Sometimes I forego a monthly investment to put the money to use somewhere else.
Cheers!
-PoF
I have a followup question — I have a position in an ETF which was making losses this year. I had the setting on this position to indicate all dividends/capital gains to “reinvest”. As a result there was a recent lot on 10/1/2018 for $100 which was bought using the dividend. I did a TLH yesterday and sold all lots except the 10/1 lot thinking that would trigger the wash sale.
My question — Does buying and selling a lot within 30 days is considered as “wash sale”? or buying and selling a position (irrespective of the lot) is considered as “wash sale”?
In my case, since I did not sell a lot which was less than 30 days, will $100 of that lot considered as wash and will offset my TLH by $100?
Thanks for your help.
I didn’t see these comments before I posted further down. I did exactly that (selling all share acquired within the 30-day period, and Vanguard still flags them as wash sale.
Did anyone experience something similar and how do you convince them otherwise?
I’m sending communication for and back at the moment and just hope this clears up.
I really appreciated this post, which made me take the jump (into the currently pretty cold water) and do my first TLC. Thank you so much for the detailed write up.
…Maybe I send the link to Vanguard 😉
I’ve seen this come up in Bogleheads before — Vanguard sometimes flags you with the “i” but the math should work out so that your loss is not disallowed. This thread may be helpful.
Best,
-PoF
Great post as usual. When thinking about this I have been told by the Vanguard CFPs is try to swap into a fund tracking a different index. I have not done any yet but I know I need to look at some bond funds. Where is my time going. Oh I know it has been used up starting a new blog! http://doctoroffinancemd.com/2018/02/10/
A blog we’ve been waiting for from a voice we know and respect! Very much look forward to your contributions in this space, Hatton1!
Thanks Crispy Doc. I love your blog also.
Great timing! I actually did TLH some bonds yesterday, they were down in the 5% range, yielding a couple thousand of TLH to offset some ordinary income this year. Sold BND and purchased VBIRX, changing the yield and risk profile slightly to shorter term bonds.
I haven’t had the opportunity to TLH with bonds, as I hold all of my bond allocation in tax-deferred accounts. It does make sense that opportunities to TLH bonds will arise from time to time, though.
Thanks for the update!
-PoF
Hi PoF, great post–thanks for the detailed description and screenshots!
One question: you state that VTSAX and FSTVX follow the same index, and while both total US stock market funds, VTSAX is benchmarked to CRSP US Total Stock Market Index and FSTVX to the Dow Jones US Total Stock Market Index. It is my understanding that following different indexes (indices?) makes for good TLH bedfellows, no?
You’re definitely on to something there, nacho man. I gave a poor example. Since they follow different indices, that should be allowed.
I believe Fidelity and Schwab both follow the DJ US Total Stock Market Index, so those two are not good partners. I’ll edit the post to reflect that reality.
Thanks for picking up on that!
-PoF
Awesome. I could have used this a couple years ago when I first struggled to do this on my own. It is tough (fortunately or unfortunately) to find losses these days since everything goes up. $3K isn’t much, but why turn away free money?
It is important for people to know which funds are similar enough to be considered the same, and which are different to be exempted from the wash sale rules.
It’s tough to TLH when volatility is low, but it was incredibly easy about 9 to 10 years ago. I’ve heard from people (frequent commenter Gasem) who were able to TLH to the tune of hundreds of thousands of dollars.
Interestingly, the ability to sell specific lots was threatened in various versions of the tax reform bills, but ultimately those changes didn’t make the final bill.
Cheers!
-PoF
My tax loss harvesting extends back over 40 years. In that time I accumulated I estimate $700,000 in losses of which I’ve spent about half offsetting taxes from gains. My experience includes losses in the mid 70’s the 82 crash early 90’s early 2000’s, 2008 and a myriad of smaller “crashettes”. I’ve used the loss proceeds to re-balance post tax accounts FOR FREE. If you have the loss, which essentially cost you nothing, then your post tax account becomes similar to a pretax account in terms of re-balance BUT there is no penalty for early withdrawal if you need to spend a bit of that money.
Today I did my taxes and over the course of the past year my total brokerage account sales of stock was $888,000 as I re-balanced and cashed in stock preparing for early retirement. Blew my mind! Pay close attention; My tax bill for my re-balance was -$3000 that is to say I wrote an additional $3000 off my taxes and owed NO MONEY to my dear Uncle. This IS truly free money. It’s a bit of a hassle for sure but you may spend hours and hours on some friggin side hustle and if you had just tax loss harvested you could have been out playing golf, so it’s not trivial.
It is especially good to tax loss harvest because it gives you freedom to plan. I’m doing some Roth conversion and I’m working through the most efficient percent of my tIRA to convert. (There are a LOT of moving parts to consider. It turns out it is not at the top of the 12% nor at the top of the 24% brackets, at some point I’ll write an article on that.) I will have to pay taxes on my conversion this year. Given the market volatility and the fact that I think the Bond bull market is dead I decided to pull those taxes out of my stocks NOW while the market has relatively peaked. Buy low sell high. TLH saved me $15K The IRA I’m going to convert from will continue to grow or recede accordingly. The conversion will be a wash. If I pull 200K out of the tIRA, 200K will go into the Roth. BUT the cost of conversion already has a $15K premium locked in from the money I saved in taxes through TLH.
PoF describes the technique but you can ladder your conversions. Money in tax lots that have not appreciated much are most likely to move into the loss column. So if you have SPY and you pair it with VTI as the partner if the market further legs down you can either harvest more from SPY or if its been a year since the first harvest the new leg down will likely cause VTI to be the best candidate for harvesting so you can simply harvest VTI and plow the harvested dough back into SPY. You don’t really want to harvest much short term loss mostly long term. I have both, LTCL does not transfer past your death to your heirs so use it while you are alive.
Another example: The tax code allows you to pay 0 cap gain on brokerage money that comes out in the 12% bracket and under. The top of the 12% bracket married over 65 is $104,000 if you take the deduction into account, so if you pull out $150k from your brokerage the first $104K is tax free. Anything over that ($46K) gets taxed at 15% ($6900) but if you have some LTCL laying around the whole shooting match is tax free. We will certainly have flash crash, bubble bust etc in the future so to execute this knowledge can pay off decades later. You can either pull out your hair in a crash or play a little chess “rook to pawn 3, rook takes the queen” As Jon Anderson and Chris Squire wrote: “don’t surround yourself with yourself move on back 2 squares…”.
Thank you for the information
I am confused of what uses you could have with the TLH . Specially after Gasem comments of having 700K in losses. Please correct me if I am wrong on any these statements
1. There are 2 types of losses/gains: short term and long term. Both will be reported to you in the Brokerage Tax forms and they can be applied exchangeable after each one is exhausted (meaning after I use all my short term losses to offset short term gains and I still have some short terms losses left over, I could use the left over to offset long term gains)
Once one THL and realize the loss (either long or short term) , the uses for it are:
1. Offset ordinary income up to 3K (creating tax savings of ~ 1K for people on high tax bracket)
2. Offset capital gains when selling appreciated funds in a taxable account
3. Offset the gain when doing Roth conversions (lets say I have a 300 K in my 403b and I am moving to a different job, could I roll it over to a IRA and then Roth convert it all , creating a gain of 300K and finally offset it with losses from TLH, with a potential of no taxes on the conversion if I were to have 300K on losses from TLH ?
4. Any other situations where one could use those THL? Say selling a rental property with a profit, winning the lotto 🙂 , etc.
Once harvested LTCL or STCL can be used against any gain. For example I own BTC which even at today’s price is still up 25x. When I sell BTC I can offset my cap gain on my tax return with LTCL or STCL. If you sell an appreciated property you can use it to offset your gain.
I’m a big believer in diversity as part of my portfolio’s risk management, which means fairly frequent portfolio re-balancing among asset classes in the portfolio. LTCL and STCL allows for portfolio re-balancing at virtually no cost.
It’s my understanding you use STCL with STCG and LTCL with LTCG but once you run out of one if you have some of the other you can apply it. I haven’t studied that lately. I consider capital loss an asset class. What you have is what the government says you get to keep after taxes, so cap loss is like a shield against value erosion.
WRT Roth conversion cap loss does not apply directly. Withdrawn IRA money is taxed as ordinary income subject to the usual progressive income tax rate. You can however obtain maximum Roth conversion efficiency by living on cash (and therefore owe no tax) while converting so only the conversion money is subject to tax. This gives you the most bang for the buck since you don’t have other income boosting up the tax bill. To live on cash tax free during the period of conversion, have a post tax account which you grew over some decades, mix it with some THL cap loss also acquired over some decades and voila’ you be livin’ large tax free while doing your conversions at rock bottom prices
This is very helpful and obviously took you a while to put together – kudos! I’ve read a lot about it but never saw anyone step through the process. The only thing I don’t like about setting it up is turning off the automatic dividend reinvest. That just becomes “another thing” I have to do (reinvesting them periodically).
One of my principal qualities as an investor is my laziness. My time is valuable and the beauty of index funds is the set-and-forget simplicity. I have bikes to ride and mountains to climb. I’ll have to do some thinking to evaluate if this is worth it to me, being that I’m already financially independent.
Great post!
True AF. (and I mean AF as in accidental fire, not the acronym used by kids these days… 🙂 )
Turning off the DRIP is an extra step, and it’s easy to forget to check, which is why it might be a good idea to have that money land in a checking account where you’ll be more likely to check the balance regularly.
I turned off my automated reinvestments maybe 4 years ago or so after I inadvertently created a small partial wash sale when I was just learning how to TLH myself. You can learn from my mistake.
Cheers!
-PoF
Yeah, I’ll have to consider this. Between this and credit-card churning I’m cautiously debating how much I want to complicate my life.
And yes, obviously didn’t think through the default acronym that my blog name would become when I originally named it. I probably could have planned better there… oh well 🙂
You’re on FIRE AF.
Interpret that however you wish.
Cheers!
-PoF
totally agree with AF here. I love the idea of harvesting losses I can carry forward for ~1k of tax savings per year but the loss of automated dividend reinvesting is very sad to me. The hard part is the wash sale created by “immediate family” trades — i really need to worry about my kids 529? or those married who have not mixed finances completely, this becomes an annoyance not just for me but also my spouse.
If i’m particularly efficient at this, it’s still time to pay the piper — my cost basis is going to be at record lows for everything. Not the worst problem to have — especially if you have favorite charities you plan to give to or pass on to your heirs but not the firesale ppl make it out to be either.
I agree! This is great step-by-step advice and the screen shots are super helpful. I like the idea of having your dividends deposited in a money market account so you can reinvest them–helps you have a clearer picture of your dividend income, as well. Thanks!
Wow, this is very thorough, PoF! Great job breaking everything down in detail. I’m sure everyone is hitting the “bookmark this” button on their browser right now 🙂
My sentiments exactly ??
Do you also have a book that you published this and other helpful information all-in-one as I am sure inquiring minds would like to know?
Really helpful post, POF!
I am not to the point of having a taxable account yet, but am filing this one away for when I start pounding money into one in about 18 months.
Do you keep the single email you get with the amount you purchased and then sold for in your filing cabinet (in case of an IRS audit) or does Vanguard send you a specific tax form with the information of your losses for the year? Just curious if this gets combined somewhere or if you have to keep each individual tax loss harvesting move you make separately?
Thank you, TPP.
I don’t like to save paper. I tend to be a trusting to a fault, but I trust Vanguard with the information. The 1099-B should give you a year’s worth of TLH activity.
Best,
-PoF