TLH Still Possible?

[ENT Doc]

So let's say the new FIFO rule takes effect with respect to sale of securities.  If you have your entire taxable account in one place I can see how this would prevent TLH.  Saw a Morningstar article that opened up a possible door to TLHing, albeit more annoying and complex.  While not specifically outlined in the article, I imagine it would go something like this:

1. Open up a new taxable account at, say, Fidelity.  Maintain one at Vanguard.  Put in $X to TSM investor shares at Fidelity.

2.  Wait until your next planned deposit.  If the prior deposit is at a loss, TLH at Fidelity.  If stable, keep it and place additional funds.  If the original investment goes up, do an in-kind transfer to Vanguard (at which point it upgrades to admiral shares), and put your next investment into TSM investor shares at Fidelity.

You could also do >2 brokerage firms, but you're essentially using a fresh purchase so that the new FIFO rule will be satisfied with a TLH.

Issues:

1. What happens to partial shares with an in-kind transfer?

2. Brokerage firm screwing up your cost basis, need to maintain (more) diligent records.

3. Paying a higher expense ratio for investor shares with what otherwise could have been admiral shares at Vanguard, at least while the funds are still at Fidelity.

4. Is this legal (step doctrine, etc.)?

 

Thoughts?

[Lithium]

I haven't read that part of the bill but I'd be surprised if it allows you to circumvent FIFO simply by keeping shares in multiple accounts.  You can't circumvent the wash sale rule that way.

in your example, how much would you want to see a lot go up in price before you determine it's unlikely to drop below its cost basis and then move it to Vanguard?  5%? 10%? 20%?

partial shares of ETF's are typically sold prior to transfer.  I'm not sure about mutual funds.

 

[ENT Doc]

I haven't seen anything about sale requirements other than it will require FIFO. Look at a current example though - if you selected FIFO at Vanguard are you mandated to have them check at all other brokerage firms before initiating the sale? Obviously not. So this may work. A wash sale has specific definitions though. Not sure about the threshold. I probably wouldn't keep it in the Fidelity account if it went up by 5% or more. You won't luck out every time the market has a downturn but you just need to hit it big once to have significant carryover losses. Will wait to see what shakes out.

[FIREshrink]

Is this in both house and Senate versions?

[AR]

Few questions about this:

Can we assume that any losses harvested this year, even if they are not harvested by a FIFO sale, can be carried forward to future years and used to offset gains?

Is the $3000 against earned income still available next year?

Does the law say that when you sell it has to be FIFO or does it say that you can still do a sale that is not FIFO, but if you do that it can't be deducted?

 

[ENT Doc]

FIREshrink wrote:

Is this in both house and Senate versions?

Click to expand...

I don't believe so - I think it's only in the Senate version.  Fingers crossed...

[ENT Doc]

AR wrote:

Few questions about this:

Can we assume that any losses harvested this year, even if they are not harvested by a FIFO sale, can be carried forward to future years and used to offset gains?

Is the $3000 against earned income still available next year?

Does the law say that when you sell it has to be FIFO or does it say that you can still do a sale that is not FIFO, but if you do that it can’t be deducted?

 

Click to expand...

There are only a few pages that deal with this in the PDF that's going around.  Carry forward losses from prior sales of securities are not addressed in them.  However, in searching the WHOLE document for "carryforward" I did not find anything stating that the prior carryforward losses are going away.  In fact, for corporations it used to be that business losses could be applied back 2 years and forward for 20.  This bill scraps those year limitations completely and makes them towards ANY tax year.  Interesting break for businesses.

So in a nutshell I believe the carrforward losses *should* still be available to you.  The law does say that, "Unless the Secretary permits the use of an average basis method of determining cost, in the case of the sale, exchange, or other disposition of a specified security, the basis of such security shall be determined on a first-in-first-out basis."  I'm not sure which "Secretary" they are referring to (Treasury perhaps), but it appears sales will be based on FIFO.