Announcement

Collapse
No announcement yet.

Practical aspects of tax-loss harvesting

Collapse
X
 
  • Filter
  • Time
  • Show
Clear All
new posts

  • Practical aspects of tax-loss harvesting

    I've been TLH for the first time this year (brokerage acct in Fidelity), but wanted to know practically what happens at the end of the year to offset the $3k income and any capital gains. Is this something that just happens automatically when Fidelity issues my tax forms, or is there some extra step I need to take at tax time?

    Also, I've been keeping track of my TLH by looking at the "closed positions" on Fidelity, however once the "offsetting" kicks in, what's a good way to keep track of my residual accumulated losses?

  • #2
    Schedule D will keep track of all of this. It's plug and play with your tax software. Enter all the forms you get from Fidelity and it'll calculate everything and keep track of your capital loss carryover.

    Comment


    • #3
      Another "nuts and bolts" TLH question. I have ITOT and VTI as tax loss partners. I currently have a sub-$100 loss in ITOT, but TLH that to VTI would simplify to a single ticker. Makes sense to me. Thoughts?

      Comment


      • #4
        Originally posted by gap55u View Post
        Another "nuts and bolts" TLH question. I have ITOT and VTI as tax loss partners. I currently have a sub-$100 loss in ITOT, but TLH that to VTI would simplify to a single ticker. Makes sense to me. Thoughts?
        Yes. One little trick to keep in mind - itot has an ex-dividend date of 9/26. Vti has its on 9/23. If you sell itot and buy vti on 9/23 you don’t get the dividend for either which means you save a little $ come tax time.

        Comment


        • #5
          Originally posted by Lithium View Post

          Yes. One little trick to keep in mind - itot has an ex-dividend date of 9/26. Vti has its on 9/23. If you sell itot and buy vti on 9/23 you don’t get the dividend for either which means you save a little $ come tax time.
          Maybe I'm looking at this the wrong way, but isn't this an example of the tail wagging the dog? I don't like to pay extra tax, especially at ordinary income rates if those dividends wind up being non-qualified. However, why is it better to pay $0 on a dividend that you don't receive rather than pay about $40 on a $100 dividend? In the second case aren't you still ahead by $60?

          Comment


          • #6
            Originally posted by 99mkw View Post

            Maybe I'm looking at this the wrong way, but isn't this an example of the tail wagging the dog? I don't like to pay extra tax, especially at ordinary income rates if those dividends wind up being non-qualified. However, why is it better to pay $0 on a dividend that you don't receive rather than pay about $40 on a $100 dividend? In the second case aren't you still ahead by $60?
            Dividends are not free money. They come at a cost of a lower NAV of the underlying security.

            Comment


            • #7
              Originally posted by Lithium View Post

              Dividends are not free money. They come at a cost of a lower NAV of the underlying security.
              Sure, you can try to buy stocks or funds that do not have dividends. But we are talking about total market ETFs that you already own so I do not think that is relevant to this scenario. I would like to know why it is smart to TLH just before the dividend you would otherwise get.

              Comment


              • #8
                Originally posted by 99mkw View Post

                Sure, you can try to buy stocks or funds that do not have dividends. But we are talking about total market ETFs that you already own so I do not think that is relevant to this scenario. I would like to know why it is smart to TLH just before the dividend you would otherwise get.
                You have $100k of a total market ETF.

                Option A - take a quarterly dividend worth 2% dividend yield x 0.25 = $500. Your ETF now has $99.5k remaining.

                Option B - don’t buy the dividend. Your ETF has $100k if you buy after the ex-div date.

                In the end you have the same amount of money, except Option A is a taxable event, and Option B isn’t. Dividends are fantastic for people who like paying taxes.

                Comment


                • #9
                  Sorry if I'm being dense, but your example makes absolutely no sense. When I purchase a security through a brokerage, the only option I've ever gotten is whether or not to reinvest dividends. Taking the dividend leaves me with $100k in the ETF and $500 in cash. Reinvesting leaves me with no cash and $100.5k in the ETF. I owe the tax no matter which one I choose.

                  I have tried seaching terms like "decline dividend to save taxes" and come up empty. In WCI's April post on TLH, the only discussion of dividends boiled down to
                  If you don't hold a security for at least 60 days around the dividend date, you will turn that dividend from a qualified dividend into a non-qualified dividend, eliminating a lot of the benefit of that tax loss.
                  WCI's Sept post on TLH specifically mentioned not automatically reinvesting dividends to avoid wash sales:
                  Avoid reinvesting dividends automatically in your taxable account and watch that IRA/Roth IRA to make sure you don't have the same holding there as your taxable account.
                  If there was some way to choose not to receive dividends at all I think it would have been mentioned there. POF also seems to be unaware of such a work-around, since his post on why selling shares beats collecting dividends, he says
                  I also plan to collect quarterly dividends from my index funds, but if Vanguard were Burger King and I could “have it my way,” I’d hold the dividends and take bites out of my account only as needed.
                  Since he can't "have it my way," he says
                  Dividends are one component of total return from an investment (the other being capital appreciation) and I like a good total return. I certainly wouldn’t want to give up a portion of my returns. If companies are paying dividends, I’ll certainly take them.
                  If you know of some hack for retail investors to make an election not to accept a dividend on something like VTI or ITOT, avoid taxes and somehow increase value of their position then please share it.

                  Comment


                  • #10
                    You still have just $100k total after the dividend, not $100.5k.

                    It’s not free money, it comes out of the NAV.

                    Comment


                    • #11
                      OK, I think I understand now. I was thrown off by the way Lithium started his hypothetical:
                      You have $100k of a total market ETF.
                      That made it seem like a simplified example that wasn't about TLH. For that simplified example, it would be clearer to say you are planning to invest $100k in a total market ETF and the choice is buying it before or after the dividend date. Then I can totally see the logic of waiting to avoid the dividend payment and the associated taxes. However, the prices of ETFs are moving all day long, only in part because of the dividend. In some cases I can see timing your purchases based on dividend dates, but in many cases the timing of your TLH will be driven by a large decrease in price that is unrelated to the dividend date.

                      Comment

                      Working...
                      X