Tax Loss Harvesting Help

[Tom]

Hi All.  I've never tax harvested before but have been reading up on it.  I want to get in on the action, so can the seasoned investor help with the following questions please:

1) How do I know which funds are equivalent to do the switching.  I've picked up a few tidbits from this forum (e.g. Vanguard TSM for Fidelity TSM, or Vanguard TSM for Vanguard 500), but is there a list somewhere that helps you find equivalent funds?

2) When you switch, do you have to sell the whole enchilada (e.g. exchange all of VTI for Vanguard 500), or can your sell only the lots that had losses.  From my reading, you have to sell the whole thing, since the re-invested dividend from the remaining lots can trigger a wash sale.

Thanks.

T

[PhysicianOnFIRE]

1) This comes up on Bogleheads from time to time.  The consensus seems to be that you should be OK as long as they're not the exact same fund (don't trade admiral shares for investor shares or the ETF of the same fund).  Here is a thread discussing this issue with some examples.

2.  No!  Only sell the losses.  Make sure you have "Specific ID" set as your cost basis.  Sell the reds, keep the greens.  Reinvesting a dividend into that same fund within 30 days before or after a TLH sale can result in a partial wash sale.  Rather than automatically reinvest, I have dividends sent to a checking account, then manually reinvest them into 1 fund of my choosing.  You can also send them to a money market fund so the money never leaves your fund company, and reinvest from there. There are minimums in the MM funds though, I believe Vanguard's is $3000.

 

[Tom]

Thanks so much, physicianonfire.  That helps.  Hoping to take the plunge soon.

[PTM]

No--there is no minimum to vanguards money market account (if you have a taxable account with them).  I have 24 cents in mine now!

[PhysicianOnFIRE]

PTM wrote:

No–there is no minimum to vanguards money market account (if you have a taxable account with them).  I have 24 cents in mine now!

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Good to know!  When I look it up, I see Federal Money Market (VMFXX) and Prime Money Market (VMMXX).  Both show a $3000 minimum investment.  Perhaps that is to open?

I haven't opened a Vanguard MM fund because I interpret the $3000 as an account minimum.  I'd rather have that $3000 at Ally earning about  1% than 0.25% or 0.34%.  But if I can fund it, then liquidate it without any fuss, I'll just do that and keep my dividends with Vanguard rather than transferring the money back and forth between an external checking account.

[The White Coat Investor]

Tom Bodet wrote:

Hi All.  I’ve never tax harvested before but have been reading up on it.  I want to get in on the action, so can the seasoned investor help with the following questions please:

1) How do I know which funds are equivalent to do the switching.  I’ve picked up a few tidbits from this forum (e.g. Vanguard TSM for Fidelity TSM, or Vanguard TSM for Vanguard 500), but is there a list somewhere that helps you find equivalent funds?

2) When you switch, do you have to sell the whole enchilada (e.g. exchange all of VTI for Vanguard 500), or can your sell only the lots that had losses.  From my reading, you have to sell the whole thing, since the re-invested dividend from the remaining lots can trigger a wash sale.

Thanks.

T

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1. Basically you just want something with high correlation that if you got stuck with, wouldn't be so bad to hold for the long-term. The classic example is for Large Cap Blend funds. You can go TSM->Large Cap Index > 500 Index Fund > Growth Index and then after 30 days total, back to TSM. There are literally dozens of acceptable funds in that space. It gets a little harder when you're trying to TLH a precious metals fund or a health care ETF. See this post here for more info:https://www.whitecoatinvestor.com/forums/topic/what-are-your-tax-loss-harvesting-partners/ I plan to keep updating what I'm doing with 6 or 7 asset classes I have in taxable.

2. You don't have to sell the whole enchilada, but if the whole enchilada is at a loss, then you should do so. It will not only give you some tax losses, but it will consolidate your holdings a bit. But if only some of your shares have a loss, specifically identify those shares.

Don't reinvest dividends in taxable. That will give you tax nightmares.

[childay]

Also don't forget to not reinvest dividends in non-taxable accounts if you have the same funds there!

[Tom]

There isn't a minimum in my Vanguard MM account either.

 

"Don’t reinvest dividends in taxable. That will give you tax nightmares."

I am assuming the same is true for capital gains?

 

"Also don’t forget to not reinvest dividends in non-taxable accounts if you have the same funds there!"

If you have the dividends distributed and not reinvested, they leave the tax-deferred environment.  Wouldn't this be counterproductive, nullifying the compounding effect in the tax sheltered account?  With a large amount in a tax sheltered account, I am not sure the benefit of TLH is worth it.

 

[Alan10km]

I'd like to add another tax loss harvest help request to Tom's.  I too have been looking into doing some tax loss harvesting on my own.   I went as far as to turning off my automatic reinvestments in all of my taxable holdings but then I got nervous and switched it back.  For some reason I thought that if I had the dividends go to my account that I would get taxed on them at that time, but if I automatically reinvested them that I wouldn't get taxed on them until I sold anything.  Am I now correct in my thinking that the amount of taxes will be the same wether I have my dividends go to my general taxable account to reinvest on my own or if I just do the automatic reinvestment.

I am just a little confused but don't want to miss out on a great opportunity, but I also don't want to make my taxes and investing too complicated.

Thanks in advance.

[Bott1637]

Tom the worry is if you reinvest dividends in your 401k in say TSM but try to TLH TSM in your taxable account the dates can create a wash sale.  If you aren't trying to TLH funds that you hold in your tax deferred accounts it doesn't matter you can do with them what you please.  No on is advocating withdrawing the dividends from tax deferred space just paying them to a money market fund which can then be redirected at a time and to a fund of your choosing.

 

Alan in your taxable account you get a statement each year reporting those dividends.  Automatically reinvesting them is the same tax hit as getting paid them and reinvesting them so yes your taxes would be the same.  To simplify things as described above pay them to a money market fund held in the taxable account.  Then reinvest them at a time you are normally adding money.  Less tax lots and less chance to mess up TLH and helps with rebalancing.

[Alan10km]

Thanks for clarifying. I turned off the auto reinvest for my taxable yesterday after reading some more but it is nice to hear it again.

[Tom]

Makes sense, Joshua K.  Thanks.

Alan: agree with Joshua on the tax hit question.  Good luck with your TLH endeavors.

 

 

[The White Coat Investor]

Tom Bodet wrote:

There isn’t a minimum in my Vanguard MM account either.

 

“Don’t reinvest dividends in taxable. That will give you tax nightmares.”

I am assuming the same is true for capital gains?

 

“Also don’t forget to not reinvest dividends in non-taxable accounts if you have the same funds there!”

If you have the dividends distributed and not reinvested, they leave the tax-deferred environment.  Wouldn’t this be counterproductive, nullifying the compounding effect in the tax sheltered account?  With a large amount in a tax sheltered account, I am not sure the benefit of TLH is worth it.

 

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Yes, capital gains distributions too

[G]

For the Vanguard MM, I think you might need to open it with $3k, but after that you can move it around, there is no minimum balance.

[PTM]

so just to clarify the process:

 

I just sold an investment for a $5,000 loss by exchanging into a new vanguard fund.

 

I can sell/rebuy in 31 days if price is flat or down, or hold for eternity if I choose.

 

Let say next year at tax time, I have 2k in capital gains.  Can I use the 5K loss to offset my 2K capital gains AND 3k of regular income?