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

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.

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.

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.

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