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Trying to understand Tax Loss Harvesting. Thanks!

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  • Trying to understand Tax Loss Harvesting. Thanks!

    Trying to wrap my head around tax loss harvesting and looking for some clarification. I’ve never personally done it yet as all my assets are in tax protected accounts, but in a few years that will no longer be the case. I understand the basic principles behind TLH and the ability to offset capital gains and up to $3k of ordinary income. I have a few specific questions. FYI - currently a medical resident with low income but in a few years will be making attending income at a much higher tax bracket.

    Can you specify which specific contribution of a similar asset within an account that you want to tax loss harvest?
    -Example: VTSAX (taxable) invested in 2014 at $100. VTSAX invested in 2015 at $100. VTSAX invested in 2016 at $200. Current price is now $150 meaning first two investments would be gains and last one would be a loss.
    -If I want to TLH the money from 2016 contribution, is there a specific way to do that? If I just put a sell order for VTSAX, do they preferentially apply a short term capital loss on the new contributions or will it go toward the capital gains on older contributions?

    If selling VTSAX to tax loss harvest, do most people wait 30 days and just reinvest back into VTSAX (avoid wash sale rule) and just stay out of the market. Or do people simply just invest in something similar but still different such as (VFIAX or FSTVX)? Seems like only being out a month isn’t that big a deal and you get to keep your portfolio pretty simple rather than adding other funds or having to subsequently sell those funds and re-buy the original one?

    Is there a need to TLH significantly more than 3000? I can understand TLH a few years worth as you can carry things forward, but if you have a really bad year such as 2008, does it make sense to do a huge TLH? I ask because that will reset your basis to a lower level. Also, if you plan on holding a particular asset such as VTSAX indefinitely (which I plan on doing) then I won’t be experiencing capital gains on an annual basis. My hope is to only realize those capital gains in retirement when I’ve stopped making contributions, hopefully at a tax bracket much lower (possibly even meaning a 0% tax payment if low enough). The lower basis of the initial TLH could impact this, right?


  • #2
    If this is true:  "all my assets are in tax protected accounts, " then there is no opportunity of TLH within a tax protected account.


    If you are conceptualizing future TLH in a taxable account, then

    --look to schwab and  ishares for Vanguard equivalents.

    --ETFs take 3 days to settle,  mutual funds take one day to settle

    --to TLH losses only, you will need to sell only the specific LOTS with losses. If blended in with appreciated lots, you may need a Vanguard rep to do this for you.  (I've never sold within a blend of lots. )

    --do not stay out of the market for 30 days.  You run the risk of the market running up without you .


    Example:    In 2001,  I TLH >$100,000. I used it to offset cap gains and earned income for 13 years.  My trump card expired for 2014, and I was forced to pay cap gains at the highest rate. I've recently  reaccumulated >$150,000 for the future.


    • #3
      Use Specific ID as your cost basis.  I believe default with Vanguard is average cost.  Change it so that you can specify the lot you want to sell.


      As Jay-Z pointed out, being out of the market for a month can be a big deal.  You're going to tax loss harvest oafter a loss, and the markets often bounce back in that time.  Use a TLH partner as you suggested.


      Carry over as much as you can in losses.  They could be used to offset the sale of a second home as an example.   Your cost basis is a non-issue if you are retired and able to remain in the 15% income tax bracket, since capital gains will be 0.  For every dollar your basis has been lowered, you will have a dollar of carryover loss to cancel it, so at worst, you break even.