Why I don't do Tax loss harvesting

[JKG]

For our taxable accounts, we set our allocation at 50% VTSAX, 25% VTIAX, and 25% VWSTX. Obviously it changes depending on the markets perform. I rebalance by buying whatever has decreased in value monthly, based on our cash flow. Now, I concede that I could be wrong, but so far I have not exchanged any of the stock funds for a similar fund because:

1. We aren’t taking distributions, so we don’t need cash freed up. We don’t have big gains from selling anything either, so we don’t need the cash.  None of our positions have gotten so overweight, that we need to trim them down to keep our risk situation the same. Having to take those gains are the biggest reason that some do tax loss harvesting.

2. Our gains are usually only the gains that Vanguard distributes in December, and since we invest in index funds, those gains aren’t usually too much. We easily cover that small tax bill with our FIT withholding.

3. I don't think that there is a great equivalent for the Total stock market fund; the best option I see is Vanguard's 500 Admiral index fund. I don't love the idea of exchanging 3000+ stocks for 500.

4. The international fund equivalent for VTIAX would be VFWAX, which would trade 6000 stocks for 2500.

5. Inertia. I really like the funds we have for their low cost and diversification across the broad market. I also don't like trading in general, even though the switch can take about 2 minutes online. I like the idea of picking a strategy and sticking with it.

6. We have a very low marginal utility of wealth at this point. The most we can apply towards our taxes is a $3000 loss as a deduction, which translates into a tax savings of about $1000. That's certainly not insignificant. However, we also made a lot of money last year. I understand and generally agree with the principle of paying Uncle Sam as little as possible, but money is fungible. What difference does it make in the long run if we pay an extra $1000 per year in taxes, as opposed to discretionary spending? I feel like we usually spend freely and wisely as it is. Our savings rate is 30% of gross income, I can't understand how it's going to affect us at all in the long run.

I am NOT saying that no one should ever do TLH, it's just for our situation, the juice isn't worth the squeeze, IMHO.

[asmallchild]

Same reasoning, I've wondered if the hassle is worth the savings and have held off on harvesting thus far. Similar financial situation where we are high earners, saving nearly 40% of gross, and don't anticipate a need for the money for at least 10 years, likely 20+

Nice to see someone else with a similar philosophy

 

Anyone with an opposing view? ☺

[childay]

Seems like minimal work for a $1000 (or more depending on bracket) tax break.  Once you understand how to do it at least.

[PhysicianOnFIRE]

I tax loss harvested about $30,000 in losses in 2015.   If I never did it again (confession: I already have), I would have 10 years worth of losses to carry forward, or $10,000 in tax savings.

There is the counterargument (against TLH) that you'll end up paying taxes on an increased gain later.  That holds true if you remain in the same bracket indefinitely.  However, if you wait until you are in a lower tax bracket (i.e. in the 15% tax bracket in retirement) to take those gains, you may not pay any taxes at all.  Also, if you give to a donor advised fund like I can do, the capital gains vanish into thin air.

For those reasons, I like to tax loss harvest.  It also helps me feel a little better when I see my portfolio decrease.  Opportunity knocking!

 

[Gas_Doc]

PhysicianOnFIRE wrote:

I tax loss harvested about $30,000 in losses in 2015.   If I never did it again (confession: I already have), I would have 10 years worth of losses to carry forward, or $10,000 in tax savings.

There is the counterargument (against TLH) that you’ll end up paying taxes on an increased gain later.  That holds true if you remain in the same bracket indefinitely.  However, if you wait until you are in a lower tax bracket (i.e. in the 15% tax bracket in retirement) to take those gains, you may not pay any taxes at all.  Also, if you give to a donor advised fund like I can do, the capital gains vanish into thin air.

For those reasons, I like to tax loss harvest.  It also helps me feel a little better when I see my portfolio decrease.  Opportunity knocking!

 

Click to expand...

Wait, wouldn't any greater gains appreciated from Tax Loss-Harvesting in the future be taxed at the capital gains tax rate of 15% (assuming you waited the allotted time for the gains to be come long-term gains) rather than as straight income tax at your usual tax bracket?

 

So essentially you are getting a 30-40% tax break with TLH in down years in exchange for a 15% increase in taxes when "tax gain harvesting," correct?

[PhysicianOnFIRE]

Gas_Doc wrote:

PhysicianOnFIRE wrote:

I tax loss harvested about $30,000 in losses in 2015.   If I never did it again (confession: I already have), I would have 10 years worth of losses to carry forward, or $10,000 in tax savings.

There is the counterargument (against TLH) that you’ll end up paying taxes on an increased gain later.  That holds true if you remain in the same bracket indefinitely.  However, if you wait until you are in a lower tax bracket (i.e. in the 15% tax bracket in retirement) to take those gains, you may not pay any taxes at all.  Also, if you give to a donor advised fund like I can do, the capital gains vanish into thin air.

For those reasons, I like to tax loss harvest.  It also helps me feel a little better when I see my portfolio decrease.  Opportunity knocking!

 

Click to expand…

Wait, wouldn’t any greater gains appreciated from Tax Loss-Harvesting in the future be taxed at the capital gains tax rate of 15% (assuming you waited the allotted time for the gains to be come long-term gains) rather than as straight income tax at your usual tax bracket?

 

So essentially you are getting a 30-40% tax break with TLH in down years in exchange for a 15% increase in taxes when “tax gain harvesting,” correct?

Click to expand...

Correct.  But it can get even better.  If I wait to sell until I am (early) retired and able to keep taxable income under about $75,000 (today's 15% tax bracket), capital gains are taxed at 0%.  So all gain ($1000 tax break now), no pain (no tax consequences later) in that scenario.  Same goes if you later donate the fund directly to charity or a donor advised fund that you direct.

[The White Coat Investor]

I tax loss harvest for several reasons.

#1) It gives me a $3000 deduction each year. You don't get tax losses every year, so you have to grab them in a bear market and stretch them out for 5 or 10 years.

#2) It allows me to get my investment income tax free. All those dividends and mutual fund capital gains distributions get wiped out in addition to the $3K a year.

#3) It doesn't help that much if you eventually recapture those gains. But for me, I don't because I use the appreciated shares for charitable donations. My taxable account LOWERS my taxes.

#4) Money now is worth more than money later, even if the gains are recaptured. Plus, they might be recaptured when you are in a lower capital gains bracket. I'm in the 20% (actually 23.8%) now, but suspect I'll be in the 15% bracket in retirement.

#5) I doubt I'll spend it all before I die. So anything left over gets a step-up in basis and those gains aren't recaptured then either.

#6) TLHing allows me to consolidate my holdings sometimes. Even if I bought shares at multiple times, when the price drops below the lowest priced shares, I can lump them all back together.

#7) Having tons of tax losses allows you to later make portfolio changes without having to worry about the tax consequences.

But there is no doubt it can be a pain and there are some associated costs with it. Worth it for me but perhaps not everyone.

I've picked up $15K in tax losses in the last month. That's 5 years worth of deductions. Beats a kick in the teeth.

[Hatton]

For any of you who have not been through a bear market like 2008 TLH is the one gift the you receive.  I was able to harvest 300K in carry forward losses that year by switching from one fund to a similar one.  I paid no capital gain taxes until 2014 and deducted the 3k/year. I was able to realign my portfolio in 2013 when I switched from using Merrill Lynch to Vanguard with little to no tax hit.  I harvested 36k last year swapping Vanguard foreign funds.  My point is swap the losses, stay invested and you will eventually be able to use them.

[JKG]

Good points all. We're in our mid thirties and have no plans to touch our taxable accounts for at least 15-20 years. A few years prior to retirement when we do have to take capital gains, we will surely take advantage of TLH to offset some gains. One thing that's guaranteed is that there will be plenty more bear markets to come, and more opportunities to sell our losses! Right now though, I want to keep buying those funds I mentioned at the beginning of this post.

[PhysicianOnFIRE]

A lot of great points made.  The rules make it a bit complex, and Vanguard doesn't make it all that easy.  The default cost basis is "average cost" for your taxable funds.  Be sure to change that to "Specific ID" if you plan to TLH.  Also, having divididends automatically reinvested can lead to at least a partial wash sale.  I have my dividends deposited into a checking account; I decide which individual fund to reinvest them in from there.

One last detail, WCI gave us 7 good reasons why he does TLH.  A minor correction though, dividends cannot be offset by capital losses.  But the $3000 in ordinary income and any capital gains will be.

[The White Coat Investor]

PhysicianOnFIRE wrote:

A lot of great points made.  The rules make it a bit complex, and Vanguard doesn’t make it all that easy.  The default cost basis is “average cost” for your taxable funds.  Be sure to change that to “Specific ID” if you plan to TLH.  Also, having divididends automatically reinvested can lead to at least a partial wash sale.  I have my dividends deposited into a checking account; I decide which individual fund to reinvest them in from there.

One last detail, WCI gave us 7 good reasons why he does TLH.  A minor correction though, dividends cannot be offset by capital losses.  But the $3000 in ordinary income and any capital gains will be.

Click to expand...

Yup, that's right. Not sure why I thought that. Tax losses can only offset dividends in the same way they offset earned income. For some reason I was thinking dividends showed up on Schedule D, but they don't, they're on the 1040 directly.

[Toshi]

hatton1 wrote:

For any of you who have not been through a bear market like 2008 TLH is the one gift the you receive.  I was able to harvest 300K in carry forward losses that year by switching from one fund to a similar one.  I paid no capital gain taxes until 2014 and deducted the 3k/year. I was able to realign my portfolio in 2013 when I switched from using Merrill Lynch to Vanguard with little to no tax hit.  I harvested 36k last year swapping Vanguard foreign funds.  My point is swap the losses, stay invested and you will eventually be able to use them.

Click to expand...

Was there a typo in there? If you're truly harvested $336k in losses I don't see why you'd bother going forward unless you have the secret to living 100+ years… I suppose you can use it to continually offset other gains, but that's still a huge pile to carry forward.

[RetiredERdoc]

I TLH about 68k after the 2008/9 crash. I used the 3k yearly income offset until I retired last year. I still had losses left over, which I am using for 2015 taxes to offset gains from private stock sale. All in all I am very glad I did it. I just TLH for 12k in losses yesterday, and I will use that 3k to help minimize taxes on roth conversions over the next few years.

[PTM]

Just TLH 5500 today.  since I have no capital gains (and wont because I plan to buy and hold like JKG), I will get roughly 1k off my tax bill next year (roughly 33% tax bracket) for a few mouse clicks.

[TheGipper]

Agree with many good points above.  For those of us there who prefer VTSAX and VTIAX to alternatives, we just hope when the music stops and the market goes back up we are not stuck sitting in the chair with the inferior alternative B or C fund.  Probably won't make much difference in the long run but hurts the illusion of the "perfect portfolio".  I'd even be willing to take a small short term gain to get back into VTSAX/VTIAX if i miss the trough.  Also complicated if one wants to hold VTSAX or VTIAX in 401k.