Senate tax bill proposes eliminating ability to tax loss harvest for individuals

[InfoRPh]

Saw this in the WSJ this morning - the Senate tax bill would eliminate the ability of individuals to pick specific tax lots when selling and instead have to use FIFO. Bye bye tax loss harvesting. Also would impact charitable donations of RMDs.  But mutual fund institutions would be exempt.

 

https://www.wsj.com/articles/the-new-tax-hidden-in-the-senate-bill-now-only-hurts-individuals-1510957607

 

 

[InfoRPh]

Thinking about this more, roboadvisors would really stand to benefit as investors who still wanted to TLH would be driven to them...

[Lithium]

I don't think tax loss harvesting is worth 0.25% a year, though if this comes to pass I might throw in $10,000 to Wealthfront, which is what they manage for free.

[docnews]

If you read the article it hurts roboadvisors. The exemption is only for mutual fund management. Tax lost harvesting always sounded like a paperwork gimic to me. I think this would even the playing field even though it would cost me.

[InfoRPh]

Aha.

Although none of this could come to pass, it's caused me to pause on some decisions my husband and I are making.

We're starting a taxable account since we're maxing all tax-advantaged space.  Although the easiest thing for our equity component would be to invest in the total stock market fund, to avoid wash sales when potentially TLH-ing since we own this in our retirement funds (as well as S&P 500 funds), we've been investigating other options.  But maybe that will all end up a moot point, and we don't want to be stuck in a fund long-term that wasn't our first choice.

[FIREshrink]

can’t read the article behind paywall.

 

I’m not too concerned about TLH right now as I have no losses, but don’t be mistaken - this is a massive tax increase if you were otherwise going to bequeath some of your unused taxable account to heirs. Now you will be paying at least some taxes on all sales throughout your life, and you’ll potentially end up bequeathing lots which have losses, which would normally be a stupid thing to do.

In addition, I don’t know if this proposal addresses charitable donations, but if it does one of the major advantages of Donor Advised Funds is gone. If I have to donate lots with losses to my Donor Advised fund... well, that would be stupid.

[VagabondMD]

This is a great example of how we (including yours truly) become accustomed to exploiting various loopholes and gaming the system to our advantage and then become incensed and entitled when they attempt to take them away. The tax bills are loaded with these gotchas. When you take a step back, some of them are silly.

I would really like to see the capital gains rules changed for mutual funds, perhaps eliminating tax lots and tax loss harvesting, and only requiring taxes to be paid when fund shares are sold.

[The White Coat Investor]

I disagree that being able to deduct investment losses is a gimmick or loophole. It's not fair to tax my gains unless I get credit for my losses. As is, it's ridiculous that it's limited to just $3K a year against earned income. It's also ridiculous that gains aren't inflation-adjusted prior to the tax rates being applied (although the lower LTCG rates helps with that.)

This potential change simply somewhat incentivizes using my taxable account for real estate instead of mutual funds. It's not a huge deal though. The loss of the step-up in basis is a much bigger deal (and bad tax policy in my mind.)

[TheGipper]

Agree loss of step up basis bigger deal if comes to pass.

This will cause me to further up my (muni) bond allocation in taxable account and shift more equity funds to tax-protected.

This will also clinch the bonds go in taxable account debate. Someone start changing the bogleheads wiki!!!

[FIREshrink]

TheGipper wrote:

Agree loss of step up basis bigger deal if comes to pass.

This will cause me to further up my (muni) bond allocation in taxable account and shift more equity funds to tax-protected.

This will also clinch the bonds go in taxable account debate. Someone start changing the bogleheads wiki!!!

Click to expand...

But even though it would hurt me, I think eliminating the estate tax in favor of eliminating the step up in basis is at least fair. It’s rational. It means all gains are taxed at some point, but transfers aren’t. That’s a consistent tax policy that I could get behind.

I don’t even care so much about eliminating tax loss harvesting, but I think eliminating specific lots is non-sensical. If I have two houses, I can sell one and keep the other. If I have two pieces of artwork, I can sell one and keep the other. Why, if I have mutual fund shares, do I have to sell a pro-rated amount of two different lots? Why can’t I sell one and keep the other?

[cnceagles]

See p. 266 of the Senate bill here: https://www.finance.senate.gov/imo/media/doc/11.20.17%20Tax%20Cuts%20and%20Jobs%20Act.pdf

 

[Craigy]

FIREshrink wrote:

TheGipper wrote:

Agree loss of step up basis bigger deal if comes to pass.

This will cause me to further up my (muni) bond allocation in taxable account and shift more equity funds to tax-protected.

This will also clinch the bonds go in taxable account debate. Someone start changing the bogleheads wiki!!!

Click to expand…

But even though it would hurt me, I think eliminating the estate tax in favor of eliminating the step up in basis is at least fair. It’s rational. It means all gains are taxed at some point, but transfers aren’t. That’s a consistent tax policy that I could get behind.

I don’t even care so much about eliminating tax loss harvesting, but I think eliminating specific lots is non-sensical. If I have two houses, I can sell one and keep the other. If I have two pieces of artwork, I can sell one and keep the other. Why, if I have mutual fund shares, do I have to sell a pro-rated amount of two different lots? Why can’t I sell one and keep the other?

Click to expand...

Agree on both points.

[PHANTASOS]

I agree that it isn’t worth thinking about these things until they become law… unless you really like this stuff – so I have been thinking about it.

Let’s say with current rules, you invest once per month in taxable account at vanguard in TSM and TISM.  When the opportunity arises, you harvest losses using SpecID to select which shares you sell.

Under the new rules, you no longer have SpecID and are forced to use FIFO.

Most opportunities for tax loss harvesting arise during the first couple of years from your date of purchase (not all, but most).

New strategy:

Instead of using Vanguard only, open taxable accounts at Fidelity and TDAmeritrade (and maybe others with low or no transaction costs).

Instead of buying both TSM and TISM each month, only buy one each month - alternating which one you buy.  This would result in six purchases of TSM each year (or it’s corresponding tax-loss-harvesting partner).  We will now only talk about TSM, but would use the same strategy with TISM.

You now have to decide where to buy each month.

Let’s say in January you bought TSM at Vanguard.  It is now March, and you are trying to decide what to do:

If the price of TSM has gone down, you should harvest your losses if you haven’t already done so and purchase the TLHing partner at Vanguard (I use VCLAX).

If the price of TSM is pretty close to the same price you paid in January, go ahead and buy another lot of TSM at Vanguard.

If the price of TSM has gone up, purchase your TSM shares at Fidelity instead of Vanguard.

If the price of TSM goes down after your March purchase, but remains above the price of your January purchase, you would now have the option of selling your March lot at Fidelity (with losses) without selling the January lot (with gains) at Vanguard.

Also, it seems odd to me that you wouldn’t be able to transfer your oldest shares (with the most gains) from one brokerage to another to consolidate your highest capital gains in one taxable account (which would let you sell your oldest shares with losses in more accounts).  It seems like it would be difficult for the brokerages to track, difficult for the IRS to track, and difficult for individual investors to comply with (and quite an imposition on property rights if you couldn’t move assets from one custodian to another).

If that seems too complex, rather than purchasing TSM six times per year, you could reduce the number of purchases per year (but this could materially decrease the number of TLHing opportunities each year).

I am sure the devil is in the details, but it is an interesting/fun problem to think about.  Whatever becomes of it, I intend to continue to use whatever opportunities are legally available to me to reduce my taxes as much as possible.

[Cantrip]

This is a bad rule for the following two reasons:

1. Still must maintain specific lot identification to know the price of securities (there is no simplification)

2. Can still gain tax loss harvesting by purchasing similar but not identical funds for future tax lots (as referenced by Phantasos above).  Instead of dollar cost averaging, will need to space out purchases.  This will incentivize investors to have 10,20,30 funds instead of 3. (creates additional complexity and encourages poor investor behavior)

I have emailed my representatives in congress.  Perhaps a college intern will read the message and let them know...