How to know when to tax loss harvest?

[huruta]

We are just starting a taxable account in Vanguard. And my question is how will we know when to tax loss harvest? We plan to be in a either Vanguard total stock or S&P 500 so there will be only 1 fund to watch, but how do you watch it? How often do you look? We are used to be passive investors and don't want to look all the time, but would rather just be notified of a big dip but I don't think Vanguard sends out notices like these because they don't want people to abandon the market. How does a typically passive investor be active enough to tax loss harvest? We don't really like watching the market but don't want to miss out on opportunities for tax savings either.

P.S. For reasons stated elsewhere we decided against Betterment so have decided to TLH ourselves. We've got some equivalent funds picked out and are just needing a little help actually knowing when to execute. Thanks in advance.

[Lithium]

You watch the fund in the cost basis section.  Do yourself a favor and switch your cost basis settings to "specID" and turn off dividend reinvestment.

The only way to know when a big dip happens is to watch the market.  If you don't want to check prices every day, how often you follow is really up to you.  Once a month is pretty reasonable I think, as once you TLH you have to wait 31 days anyway before you can TLH those shares again.

[huruta]

Thanks, Lithium. Will check the cost basis settings. When we set up the account they asked if we wanted to put dividend and capital gains into a money market account and we said yes, so I think we are covered there. So I guess we'll need to monitor a bit anyway to make sure those get put back into the ETF. It's still a lot more passive than real estate investing, which was on the table at one point until we both realized neither one of us wanted to manage a property.

So there's no way anyone knows of to get an alert that the fund is down by x%? That would be kind of cool from a passive investor / tax loss harvesting stand point.

[PhysicianOnFIRE]

It looks like you could set up alerts via Vanguard. If that doesn't work well, I'm sure there are numerous third party apps and services that could do this.

I use mutual funds rather than ETFs. I couldn't find the post, but I recall WCI having issues with settlement dates after the trade date fouling things up with ETFs. With mutual funds, it's a simple exchange, i.e. VTSAX to VFIAX (total stock to S&P 500) and the exchange occurs at the end of the trading day.

As Lithium pointed out, Spec ID is a must. VTSAX and VFIAX are good TLH partners. VLCAX (large cap) could be a third if needed.

 

[WealthyDoc]

Lithium wrote:

You watch the fund in the cost basis section.  Do yourself a favor and switch your cost basis settings to “specID” and turn off dividend reinvestment.

The only way to know when a big dip happens is to watch the market.  If you don’t want to check prices every day, how often you follow is really up to you.  Once a month is pretty reasonable I think, as once you TLH you have to wait 31 days anyway before you can TLH those shares again.

Click to expand...

PoF recommends SpecID too but I'm clueless on this.  Could someone elaborate on the cost basis options and what this means?  How is it beneficial?

 

[Lithium]

Vanguard is the only broker to my knowledge that offers SpecID.  With that, you can pick and choose among any specific shares to sell.  So if you have bought some 50 shares a month, and only the shares in April, May, and June are worth TLH'ing, you can just pick those.

Other options are Highest Cost (which they have instead of SpecID at TD Ameritrade, and works just as well), Last In First Out (you sell the last shares you bought), First in First Out (sell the first shares you bought), and Average Cost (I think this means you sell shares whose cost basis averages out to the same as the average of the entire lot you have), and Lowest Cost (obviously the worst for TLH purposes).

[childay]

There are several phone apps that you can put in stocks to follow and set alerts.  You could set an alert for your buy price etc.

[huruta]

Thanks re: the Vanguard alerts (who knew, the rep I asked didn't!) and that phone apps exist for this sort of thing. I'll look into both of those. Our retirement accounts are almost all Vanguard mutual funds so using ETFs means we will avoid the wash rule. I thought ETFs was WCI's recommendation (see #10 on the attached link) but maybe we are overlooking something?

https://www.whitecoatinvestor.com/12-rules-for-simplicity-in-your-taxable-non-qualified-investing-account/

 

[PhysicianOnFIRE]

huruta wrote:

Thanks re: the Vanguard alerts (who knew, the rep I asked didn’t!) and that phone apps exist for this sort of thing. I’ll look into both of those. Our retirement accounts are almost all Vanguard mutual funds so using ETFs means we will avoid the wash rule. I thought ETFs was WCI’s recommendation (see #10 on the attached link) but maybe we are overlooking something?

https://www.whitecoatinvestor.com/12-rules-for-simplicity-in-your-taxable-non-qualified-investing-account/

 

Click to expand...

Using ETFs won't avoid the wash sale. If the mutual fund and ETF are substantially identical (ETF and mutual fund versions of the same fund are essentially the same, i.e. VTSAX and VTI) you could potentially have a wash sale.

WCI does refer to the pain of buy sell orders and dealing with a bid / ask spread. Mutual funds avoid both of these "pains" but you lose the ability to capture intra-day losses, since mutual fund prices are only updated once a day. To me, mutual funds make it simpler.

Best,

-PoF

 

[childay]

To me ETFs are slightly simpler since you don't have to be waiting till end of day to harvest your loss..

[Lithium]

This is a little off topic but I use ETFs in taxable primarily for a few different reasons:

ETFs are more portable.  I am moving back and forth between brokers all the time for bonuses and have no issues transferring ETFs in kind.

Lower trading fees, and sometimes they trade commission free (i.e. at TD Ameritrade).  Sometimes lower ERs too (ii.e. VSS).

Mutual funds have annoying minimums and "trading restrictions."  Once I had to sell a share in order to pay off a margin debit and couldn't buy back for 30 days.

 

[huruta]

Good to know others are using ETFs and helpful to understand a little bit more about their pros and cons.

Also a little off topic, but I would think that ETFs would be considered similar but distinct funds from mutual funds even if they are in the same stocks, e.g. S&P 500 ETF != (does not equal) S&P 500 Mutual funds. PoF is saying they are the same. Are there other perspectives? If they are considered the same we don't have a lot of choices with vanguard since most of our tax deferred, retirement accounts utilize these mutual funds.

 

[emp2b3]

For a related topic on some Boglehead threads there was not a great consensus on whether or not one needs to worry about 401ks and Roth IRAs in terms of wash sales. Do you all include them in your tax loss harvesting planning?

[PhysicianOnFIRE]

I've read some advantages of ETFs that I was not aware of. The ease of in-kind transfers between brokerages could certainly be advantageous.

Regarding wash sale rules, in response to emp2b3 and huruta, the IRS doesn't hash out exactly what constitutes substantially identical, or how funds in different retirement accounts will be considered. I'd rather be safe than sorry, so any funds I hold in my taxable account are not held in any retirement account.

Also, on the ETF v. mutual fund following the same index question, there is this from Bogleheads wiki:

"The IRS does not have a clear definition of substantially identical; it is determined by all the facts and circumstances in a particular case. Two share classes of the same fund, such as a mutual fund and a corresponding ETF, are probably substantially identical."

It's not definitive, but again, I'd rather be safe than sorry.

 

[Hatton]

Someone at vanguard told me that if the fund or etf tracks the same index it will trigger a wash sale. Even if you buy a fund from another company tracking the s&p 500 you could have a problem.