Tax Loss Harvesting with Vanguard: A Step by Step Guide

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

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

 

Over the last ten days, the market experienced a 10% correction for the first time in some time. While seeing several years’ worth of spending erased from our balance sheet was less than awesome, I mostly shrugged it off. 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 to have the opportunity to capture those screenshots to share in this educational post.

I have previously written about how I used tax loss harvesting to Brofit from the Brexit, but this is the first time I had the forethought to save the images each step of the way.

 

Tax Loss Harvesting Basics

 

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. In tax-advantaged retirement accounts, there are no tax implications when buying and selling within the account.

The amount of the loss can be deducted from ordinary income when you file your income taxes, up to $3,000 per year, resulting in savings of $1,000 or more for the typical high-income professional. If Uncle Sam is willing to give me $1,000 or more per year for deciding to swap some shares of a Total Stock Market Fund for the S&P 500 index every once in awhile, 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 $45,000 in losses early in the year, giving me over 15 years worth of $3,000 deductions from 2016 alone.

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

 

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. Scwab’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.

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

Interestingly, as pointed out in the comments, Vanguard’s VTSAX follows a different total stock market index, and it may be a suitable TLH partner to the Schwab and Fidelity funds. Personally, it’s close enough to a gray area that I would hesitate to make such a swap, but it’s probably just fine.

A good partner is not only a 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 use Vanguard mutual funds, but you should be able to find similar partners in mutual fund or ETF form from your favored broker, be it Fidelity, Schwab, iShares, or whomever.

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

 

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

Of course, if you’re feeling charitable, you could always donate unwanted funds to a donor advised fund if they do 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 roboadvisor’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’lltake (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 60-day (30 days before and 30 days after) timeframe.

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

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

 

Vanguard Cost Basis

 

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

 

How to Avoid a Wash Sale

 

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

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

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

 

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).

I have my taxable mutual funds set up to send all dividends to a Vanguard money market fund. In the fourth week of March, June, September, and December, 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. This is known as a partial wash sale. If you purchase 100 or more substantially identical shares within the 30-day window before or after capturing a loss by selling 100 shares, the tax benefit of your efforts is indeed eliminated.

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

 

Tax Loss Harvesting with Screenshots

 

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

 

Step 1: Recognize a loss has occurred

 

You can’t harvest a loss that you don’t know about. I track my investments with Personal Capital, and if you choose to do the same, you’ll help enhance this site’s charitable mission. I typically like to see a loss of at least $1,000, but TLH opportunities (for better or worse) have been hard to come by over the last couple years. When the market dropped a bunch after a recent investment, I pulled the trigger.

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

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

 


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

 

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

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

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

 

Tax Loss Harvesting Vanguard-1

 

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

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

 

Tax Loss Harvesting Vanguard-2

 

Step 3: Select the TLH Partner to Purchase

 

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

 

 

 

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

 

 

 

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

 

Step 4: Confirm the Tax Loss Harvest

 

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

 

 

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

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

 

 

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

A day or two later, I received a confirmation of the trade, which is essentially the same information you see above in a different format.

 

TLH Vanguard Confirmation

 

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

 

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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. Here’s an excerpt of my Vanguard 1099-B from 2016 showing a total of $45,449.15 in losses. Most were short-term losses, with the final $6,212.57 being a long-term loss.

 

TLH 1099B

 

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.

Happy tax loss harvesting!

 

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80 comments

  • 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?

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  • 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 🙂

  • 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!

  • 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

  • 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

      • Gasem

        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…”.

        • hypercube

          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.

          • Gasem

            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

  • nachos31

    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

  • 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

  • hatton1

    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/

  • SG

    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

      • SG

        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

  • DP

    Does it matter whether it is short or long-term capital losses?

  • Phoenix

    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

  • Love these step by step posts. We are opening a taxable account this year at Vanguard.

  • Zac

    Pure gold, my friend.

  • Thanks man. Great summary and am tempted to try it tonight!

  • ArmyDoc

    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

  • Rod

    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.

  • Mutts and Money

    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

  • 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!

  • Texancoqui

    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.

    • Scott

      @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.

  • 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

  • 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.

  • Destined to become another one of your reference posts along the lines of your backdoor Roth post, PoF. Thanks for the public service!

  • 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?

  • DocMatt

    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

      • Gasem

        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

  • Deborah K

    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!

  • 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

  • dinkerMatts

    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

  • Robert

    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?

    • Robert

      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:

      Q: What happens if I sell at a loss in a taxable account and then immediately repurchase it in a retirement account, such as an IRA?

      A: The IRS has ruled (Rev. Rul. 2008-5) that when an individual sells stock or securities for a loss and causes their IRA or Roth IRA to buy substantially identical stock or securities within 30 days before or after the sale, the loss on the sale is not allowed under Section 1091 and the individual’s basis in the IRA or Roth IRA is not increased by virtue of Section 1091(d).

      2) From Turbo Tax web site:

      Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one).

      • 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

        • oz

          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?

  • complete_newbie

    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

      • Travis

        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?

  • Grace

    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!

  • Grace

    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!

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  • Garth Hinkster

    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

  • Garth Hinkster

    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

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  • AK

    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

  • rr

    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?

  • Eugene

    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!

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  • Dean

    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.

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