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Tax-Loss Harvesting

Autumn is a very special time of year in Vermont. The trees are alive with color, the air is crisp, and the local farms are fully stocked with fresh apples, pumpkins, and other produce from the fall harvest.

Today, in honor of the autumn harvest, we’re going to do some harvesting of our own. Luckily, the type of harvesting we will explore is much less labor intensive than collecting a bunch of pumpkins and other weird-looking gourds from a field.

Taxes

If you are a longtime reader, you may have realized I’m pretty obsessed with minimizing taxes. To me, increasing your savings rate by decreasing your taxes is one of the best ways to retire earlier because it doesn’t require you to earn more, spend less, sacrifice anything, or take on any additional risk.

As I described in the Retire Even Earlier post, reducing your taxes can have a huge impact on your ability to retire early. In the example I gave in the article, the Lab Rat was able to reduce his short career from 11 years to just 9 years, simply by reducing his tax burden during his working years.

While the Retire Even Earlier article focused on utilizing tax-advantaged retirement accounts to lower taxes, today I’m going to discuss a powerful tax-reducing strategy that can be applied to your taxable accounts: tax-loss harvesting.

Summary

The basic idea behind tax-loss harvesting is that you sell investments that have decreased in value and then use the losses to decrease your income taxes.

Say you bought 1000 shares of VTSAX (Vanguard Total Stock Market Index) for $43 and then a few months later the price dropped to $40. Since your $43,000 investment is now worth $40,000, you have $3,000 worth of unrealized losses. If you decided to sell your shares and take the $3,000 loss, you can then use that loss to cancel out future capital gains or lower your taxable income by a maximum of $3,000 per year (any losses in excess of $3,000 can be carried forward to future years).

Stay Invested

You may be thinking, “Mad Fientist, you really are mad. Why are you telling me to buy high and sell low?”

Although I am suggesting you sell your investments at a loss, I’m not suggesting you stay out of the market after you sell.

In the simple example above, the best course of action would be to sell your shares of VTSAX for $40,000 and then use that money to immediately buy shares of an index fund that performs similarly to VTSAX but is different enough to not be considered a wash sale.

Wash Sale

A wash sale is when you sell shares at a loss but buy substantially identical investments 30 days before or after the sale.

If in the example scenario, you sold your shares of VTSAX and then immediately bought more shares of VTSAX, the transaction would be considered a wash sale and you wouldn’t be able to use those losses to reduce your taxes.

Therefore, rather than immediately repurchasing shares of VTSAX, you should instead purchase shares of a fund that performs similarly but tracks a different index (even if two funds contain similar stocks, the fact that they track different indices should be sufficient enough to avoid a wash sale). For example, maybe you could buy shares of VLCAX (Vanguard Large Cap Index) instead. That way, your money will still be invested and will still rise and fall in a similar manner but the transaction won’t be considered a wash sale.

Lab Rat Scenario

Let’s use the last 9 years of historical stock data to see how beneficial tax-loss harvesting would have been for the Lab Rat during his working years.

Assuming he only looks at his investments at the end of each year, here is what the adjusted prices of his VTSAX investment would look like.

Tax-Loss Harvesting

You can see that the price rises during the first few years, so there are no tax-loss-harvesting opportunities here. In 2008, the price dropped a bit but the majority of his portfolio was bought for less than the 2008 price so it may not be worth the hassle to harvest a small amount of losses at this point.

When he checks his portfolio in December of 2008, however, he’ll be in for a shock! The value of his investments have decreased dramatically. Rather than get scared or upset by this, the Lab Rat is smart and seizes the opportunity to not only harvest his losses but to use those tax savings to invest more money while the market is down.

To harvest his losses, he decides to sell all of his shares in VTSAX and immediately use that money to buy shares of VLCAX. Based on the numbers in the Lab Rat and Assumptions post, this sale would result in over $14,000 worth of losses.

Although VLCAX is a fine investment, he prefers VTSAX so after two months, he decides to sell all of his shares of VLCAX and use that money to repurchase shares of VTSAX. Since the market was still falling in early 2009, this generates an additional $800 worth of tax losses that he can add to the $14,000+ that he already harvested.

So with just a little bit of work and two months of being invested in VLCAX, the Lab Rat now has nearly $15,000 worth of losses that he can use to offset future capital gains or lower his taxable ordinary income.

Since his future long-term capital gains will be taxed at 0%, thanks to his low level of income in early retirement, it makes sense to use those loses to lower his ordinary taxable income while he’s still working. In this scenario, that means the Lab Rat can lower his taxable income by $3,000 for the last 5 years he is employed! Since his marginal tax rate is 15%, that means he will be able to invest an extra $450 per year that would have otherwise been spent on taxes!

Transaction Costs

Transaction costs can obviously decrease the benefits of this strategy so I’d suggest only investing in funds that do not charge any transaction fees.

You can buy and sell Vanguard index funds without paying any fees and you can trade Vanguard ETFs for free with a Vanguard brokerage account so those are great options if you want to harvest your losses for tax purposes.

Dividend Reinvestment

To avoid wash sales and to help make your record keeping easier, you may want to manually reinvest dividends in your taxable accounts. That way, you don’t have to worry about an automatic dividend reinvestment interfering with or complicating your tax-loss harvesting.

Conclusion

By simply harvesting your losses during your working years, using those losses to decrease the taxes on your ordinary income, investing those tax savings, and then happily enjoying your tax-free capital gains during early retirement, you can boost your savings rate and achieve financial independence earlier in life without much additional effort.

Are you a tax-loss harvester? If so, how much have you saved by harvesting your losses?


Image: Carissa Rogers

60 comments for “Tax-Loss Harvesting

  1. connor
    October 14, 2013 at 3:11 pm

    I’d never heard of this before and in the UK we have a slightly ‘nicer’ opportunity where we can roll over any amount for future use.

    I was struggling to work out how and where to invest money after my SIPP (401k) as I would need it in ER long before I’m 45, nevermind 55. This will assist in that nicely and I can accrue losses that will help in the future.

    Though I must check if we have an equivalent of a wash sale rule here

    Thanks MF

    • The Mad Fientist
      October 14, 2013 at 3:38 pm

      Glad it was helpful, Connor.

      I’d be really interested in hearing your findings regarding the wash-sale rules in the UK. When I lived in the UK, I had just graduated from university and I didn’t make much money so none of this stuff mattered but since my wife and I plan on going back to Scotland soon to live for at least six months every year, that sort of information could come in handy.

      Actually, I should start reading more about UK rules in general in preparation for our move so are there any UK FI blogs that you’d recommend?

      • Alex
        October 15, 2013 at 7:18 am

        MF & Connor,

        Here is a good summary of tax loss harvesting in the UK.

        Monevator is probably the best UK PF blog (useful stuff about cheapest UK index funds, broker platforms, tax). Retirement Investing Today is also worth a look (good for market data).

        I’m Scotland-based and (possibly) moving to the US soon, so your site’s been very helpful – happy to return the favour if you have any questions about UK financials or tax.

        Cheers!

        • The Mad Fientist
          October 15, 2013 at 11:23 am

          Excellent! Thanks a lot, Alex.

          Where in Scotland are you? Where in the US are you thinking about going? Maybe we could just switch places :)

          • Alex
            October 15, 2013 at 4:31 pm

            I’m in Edinburgh, finishing off a medical/cancer PhD. Not sure about location in the US yet – I’m considering options (when I get round to job applications very shortly!)

            Vermont looks pretty nice to me – swapping could be a plan! In any case you should give me a shout if you’re in town and fancy a pint :)

          • The Mad Fientist
            October 15, 2013 at 5:11 pm

            I actually just booked my wife’s flight back to Scotland for the holidays today but sadly I’m not going to be joining her this time.

            I’ll let you know next time I’m over though and we’ll definitely grab a pint!

  2. October 14, 2013 at 3:50 pm

    This is interesting. So this only applies once you have reached financial independence?

    • The Mad Fientist
      October 14, 2013 at 4:24 pm

      No, not at all. This applies to anyone who invests in a taxable investment account.

      One way you could look at it is to think of it as trading a marginal income tax rate for a long-term capital gains tax rate.

      Imagine that you are in the 25% tax bracket and the $43,000 worth of shares you bought is now worth $40,000. By harvesting those loses, you are reducing your taxable income by $3,000 and are therefore saving $750 on your income taxes ($3,000 x 25%).

      You have now lowered your cost basis for that investment though (from $43,000 to $40,000) so when you eventually sell that investment for $45,000, you have $5,000 worth of long-term capital gains instead of the $2,000 you would have had had you not harvested your tax losses.

      Therefore, you are effectively trading a marginal income tax rate (which in this case is 25%) for a lower capital gains tax rate (which would likely be 15% in this hypothetical, non-FI scenario).

      That is a great trade to make because you are not only deferring the tax (i.e. getting a free loan from Uncle Sam) but you are paying 15% instead of 25%.

      For someone who is FI and is living on a reasonable amount of income, the savings will be even greater. Since an early retiree will likely fall within the 15% tax bracket, all of their long-term capital gains will be taxed at 0% (assuming the tax laws stay the same). This means that they’ve not only deferred paying tax on that $3,000 worth of income, they’ve completely eliminated it because the long-term capital gains on the investment will eventually be taxed at 0%.

      Does that make sense or did I just muddy the waters more?

  3. October 14, 2013 at 9:41 pm

    We took advantage of tax loss harvesting to great advantage in the 2008-2009 market crash. Every year since then we have enjoyed a $3000 capital loss that offsets against ordinary income.

    Cha-ching! $1,110 in tax and other income-related savings each year (37% marginal tax rate). I think we still have around $16000 tax losses still laying around, waiting for 2013’s 1040, and 2014’s, and 2015’s, etc… :)

    The funds I bought back in 2008-09 with the proceeds from all those tax loss sales have now appreciated hugely (most up over 100%) and huge cap gains. But those cap gains aren’t taxed till I sell. So I managed to use the tax benefits of losses immediately (for the last few years and next few years), and the burden of gains will be postponed as long as possible.

    Come to think of it, I haven’t checked my tax lots in a while to see if there are any more harvesting opportunities.

    Folks, wrapping your head around tax loss harvesting like the Mad Fientist suggests is like picking up free money off the ground. Let the IRS give you a loan today on the losses you book, and maybe you pay them back later when you sell investments when you are FI.

    You can control your cap gains better when FI. For example, if you need $40k to live on, you sell an investment with basis of $20k and $20k of gains, you only have $20k of income taxed at favorable cap gains rates. You may owe very little tax or none.

    Tax loss harvesting certainly helped me get to FI at age 33. And I doubt I’ll ever have to pay much in taxes now that I’m retired and our income is much lower.

    • The Mad Fientist
      October 14, 2013 at 10:37 pm

      That’s awesome, Justin! The numbers look even better for someone with a 37% marginal tax rate so it’s good to see you’re really maxing out the benefits.

      Excellent point about controlling your capital gains after FI. I imagine it will be pretty easy to stay under the 15% income tax bracket so that all long-term capital gains and qualified dividends are taxed at 0%.

      I meant to ask you before but whereabouts in North Carolina do you guys live? I went to high school and college down there so I’m curious where you’re located.

      • October 14, 2013 at 10:46 pm

        Our fed rate will be right at zero. I expect to do some trad IRA to Roth conversions to use up the zero % bracket and make sure I have enough AGI to qualify for obamacare subsidies of some sort.

        We are in Raleigh, North Carolina. I grew up in Cary. I went to the two big state universities here for engineering then law. Where were you in North Carolina?

        • The Mad Fientist
          October 14, 2013 at 11:14 pm

          Good call on using up that 0%. I’m looking forward to taking full advantage of it next year after my income drops off.

          By the way, I really enjoyed your article on Obamacare.

          I went to high school just a bit north of Charlotte and then I went to get my degree in computer science from the same university where I imagine you studied law. It’s been a while since I’ve been back down there though so I’m looking forward to visiting that area sometime next year. We’ll have to get together for a beer at Linda’s or He’s Not :)

          • October 14, 2013 at 11:27 pm

            Yes, sounds like we attended the same university. I never went to Linda’s (from what I remember!) but went to He’s not a number of times. Look me up if you head this way! First round’s on me.

            I’m glad you enjoyed the Obamacare piece. It is one of my more popular posts, and provides a good quick summary of how obamacare can help early retirees (from a subsidy stand point, but honestly more importantly from a stability stand point)

          • The Mad Fientist
            October 14, 2013 at 11:33 pm

            My roommate’s brother was a bartender at Linda’s so that’s why I went there quite a bit. I’ll definitely let you know if I end up making it down that way next fall. Second beer’s on me!

          • October 14, 2013 at 11:35 pm

            Sounds like a plan!

  4. Nick
    October 14, 2013 at 10:04 pm

    Glad to see all of the posts recently! Thanks for sharing!

    I just had a few comments around this great madness! I have a very similar strategy for my finances, but I think it would be more beneficial to harvest the gains (and reset the cost basis) in 2004, 2005, 2006, and 2007. This would increase the rat’s cost basis and, thus, capital loss in 2008 from approximately $14,000 to $22,000! And, all of the LTCG’s from 2004-2007 would be taxed at 0% as the rat’s taxable income would still be well below the top of the 15% tax bracket when including the LTCG’s. I agree with you and think the rat should use the $3,000 loss each year against his ordinary income until the rat retires. This revised strategy might allow the rat to offset any ordinary income a few more years. Let me know what you think!

    • The Mad Fientist
      October 14, 2013 at 10:51 pm

      Nick, nice to hear from you again! As always, you’ve delivered a thought-provoking and intelligent comment (very much appreciated).

      Harvesting the capital gains is a great idea and is something I didn’t think about! So rather than do nothing during the years the value of his investments is increasing, he should instead sell and then immediately re-buy the same investments each year to lock in the capital gains (you don’t have to worry about wash sales with capital gains).

      Since the Lab Rat’s long-term capital gains tax rate is 0%, even during his working years, there is no reason not to lock in the capital gains since he doesn’t have to pay any tax on them. As you mentioned, that would allow him to increase his cost basis and then harvest an even bigger loss at the end of 2008! Excellent idea!

      • October 14, 2013 at 10:58 pm

        I “tax gain harvest” in my kids’ UTMA accounts. It’s chump change (maybe avoiding $200-300 in future tax liability), but it is also an excellent use of a few minutes to save a bunch of money.

      • Jian
        October 15, 2013 at 10:34 pm

        Hi MF,
        I was doing fine with the capital loss harvesting part, but am getting lost now with this twist of capital gain harvesting.

        Do you guys mean the two can be combined to minimize tax liability? If so, can you do some examples please to show how the 2 strategies can be used together? Sorry for being slow here.

        Also, sounds like capital gain harvesting only applies under 2 conditions. Please correct me, if I’m off.
        1. Assets have to be long-term (held over a year).
        2. AGI has to be kept under 15% marginal rate?

        Thanks!

        • The Mad Fientist
          October 16, 2013 at 5:21 pm

          Hey Jian,

          Yes, the two can be combined to further minimize the Lab Rat’s tax liability (in this case, the tax-gain harvesting is being used to increase the amount of losses he can lock in at the end of 2008).

          It’s definitely a bit confusing so you’re not being slow. In fact, I think it warrants its own post so I think I’ll write a follow-up post specifically about tax-gain harvesting. I’ll try to publish it sometime in the next week or two but in the meantime, I’ll answer your two questions…

          1) Yes, the assets should be held over a year so that the gains are taxed as long-term capital gains.
          2) To have a 0% long-term capital gains tax rate, you need to keep your AGI under the 15% marginal rate. While tax-gain harvesting could still be beneficial in some other scenarios, the 0% long-term capital gains tax rate is the reason tax-gain harvesting would be such a no-brainer in this specific situation.

          Hope that helps!

          • Jian
            October 17, 2013 at 6:47 pm

            Thanks! I look forward to your follow up piece on this.

          • Justin
            October 22, 2013 at 7:26 pm

            I, too, am looking forward to this future post. Particularly what the caveats are around income levels and taking advantage of this, it sounds like you could easily wind up increasing your taxes quite a bit if you did this and had too high a salary.

          • The Mad Fientist
            October 23, 2013 at 9:15 am

            Hey Justin, I’m currently working on the post and should hopefully publish it early next week.

            You’re absolutely right though that you would most likely not want to implement this type of strategy if you had a high salary.

            Hopefully the post will clear things up so stop by next week to check it out!

  5. Connor
    October 18, 2013 at 5:33 am

    Hey MF, Monevator as posted above has steered me in the right direction on the path of FI. I highly recommend it.

    In the UK, we have a generous (cough) pension allowance of £50k this financial year, reducing to £40k next year. This plus an ISA gives £61,520 of tax advantaged accounts. Fabulous I hear everyone shout… But is this really so.

    I’m 31 this year and with 24 years before I can officially draw my retirement fund I have a huge problem of being top heavy within my pension and not having income to retire on early.

    As it stands, I have my mortgage paid off (£153,000), £8k in my SIPP, £25k in my ISA and about £13k of emergency funds in a cash saving account. Very cash heavy but I’m in business, so when opportunities arise, I have to act quickly.

    My plan is to max out my pension for the next two years (£90,000) and then top this up with 10k each year (I’ll have income in retirement from two businesses). Taking a 6% annual gain, this would afford me an £841k pension pot at 55.

    This is where the beauty of your post struck a cord. How to best make use of the taxable uses of my money as soon as I max out my pension & ISA. I’ve read through the HRMC site and as far as I can see, we have similar laws about buying and selling shares here in the UK (30 day rule). However we can roll over all our losses indefinitely as long as they are recorded at tax time and then drawdown from them as needed, to keep us within the 10,600 capital gain allowance. BOOM!

    If shares are up, the goal will be to sell as many share each year to keep gains within the 10,600 limit. If they are down, then its to sell, move assets and rebuy after 30 days or lump them into a tax advantaged account such as an isa.

    One thing I truly havent accounted for until now, is the shortfall between retirement and drawing a pension and this has ruined my best laid plans above. Any thoughts MF?

    • The Mad Fientist
      October 22, 2013 at 11:20 am

      Hey Connor, sorry for the delayed reply; I have been out of town and am only now catching up on emails/comments/etc.

      Monevator may be the best person to ask about dealing with the early retirement shortfall because there could be something you could do to access those UK retirement accounts sooner that he may be aware of.

      For example, in the US, it’s possible to convert your other retirement accounts into a Roth IRA and then withdrawal those converted amounts five years after the conversion date, without paying any penalties.

      Based on the hassles of trying to move my UK pension money to a US retirement account (I still haven’t figure out a way to do it), I can’t imagine there’d be an easy way to access your pension money before standard retirement age but hopefully you find a way.

      Your best bet may be to focus on building your businesses so that they provide the necessary cash flow for your early retirement years.

      Or, you could take a semi-retirement approach and simply earn enough every year to cover your expenses by doing something you enjoy.

      If you’re like me, you’d probably hate to give up the tax breaks by investing most of your money in a taxable account but if you’re worried of coming up short during early retirement, that may be a good option too.

      Definitely keep me posted on what you decide to do!

      • Alex
        October 22, 2013 at 5:16 pm

        Re: transferring a UK pension to the US – supposedly it’s possible if you transfer to a ‘qualifying recognised overseas pension scheme’, or QROPS. More info at the HMRC QROPS page, which contains a list of such schemes by country (link on left), of which there are a handful in the US.

        In practice, I’ve heard it’s difficult/impossible to do as no one seems to know how to handle it on the US end, or they say the IRS won’t allow it. Would be interesting to hear if you were more successful!

        • The Mad Fientist
          October 23, 2013 at 9:07 am

          Yes, there are only a handful of QROPS in the US and sadly, I’m not currently enrolled in any of them (and after speaking with Fidelity a while back about it, I’m not able to enroll in them as an individual because they are employer-based plans).

          As you said, even if I could enroll in one, I too have heard it’s difficult to transfer everything over because nobody on this side of the pond knows how to handle the transaction.

          I’ve just resigned myself to the fact that I have a chunk of money in the UK, not really doing much, that I will need to remember to take advantage of it when I reach standard retirement age.

  6. October 22, 2013 at 12:38 pm

    I haven’t done much of this over the years, but this year I think I’m going to dump a fund that has been languishing for awhile. I love when I can accomplish two things with one action!

    • The Mad Fientist
      October 22, 2013 at 1:18 pm

      It definitely helps take the sting out of selling something for a loss!

      Thanks for stopping by and nice work coming up with the term, “pretired”. It’s fun making up words, isn’t it :)

  7. Leah
    October 25, 2013 at 7:27 pm

    Just so I’m clear… tax harvesting is a strategy people use on their taxable investment accounts, right? Or can you use this in some way on investments held in IRAs or 401ks?

    • The Mad Fientist
      October 26, 2013 at 12:04 am

      Exactly. Tax-loss harvesting is for investments in your taxable accounts only.

  8. Chris
    November 12, 2013 at 1:08 pm

    I know this is a bit random and somewhat unrelated but lets say you have a ROTH IRA you recently opened and bought a stock and then sold it 3 or 4 months later for a loss. Any way to harvest those losses even though its within an after tax retirement account? Sorry if that doesn’t make sense.

    • The Mad Fientist
      November 13, 2013 at 9:47 am

      Hi Chris, sadly you can’t harvest any losses incurred from buying and then selling a stock within a tax-advantaged account like a Roth IRA.

    • MooseOutFront
      March 30, 2014 at 3:14 pm

      Chris, I think you have options within the same tax year of the contribution only. Google roth ira horse race. I saw a discussion once on bogleheads about maxing 3 roths at the beginning of the year and then somehow canceling the 2 underperformers and pulling those funds back out at the end of the year.

  9. kyle
    December 6, 2013 at 9:49 am

    I’ll be taking advantage of some tax loss harvesting this year :) What a great methodology and the only reason you should ever sell investments at a loss. (that I can think of)

    • The Mad Fientist
      December 6, 2013 at 11:23 am

      It definitely takes the sting out of selling something for a loss :)

      • December 6, 2013 at 1:50 pm

        That’s the best feeling! “Crap, I’m taking a bath on this and losing $5000. Oh wait, make that a $3000 loss for me and ole Uncle is making a charitable contribution to cover the other $2000 of loss!” :)

  10. Matt
    December 7, 2013 at 10:39 am

    I have a question on this. I’m still relatively new to how taxes interact with investments (as, currently, I’m just getting started on investing and only have a 401K so far), but I’m a mathy person who loves optimizing things, so I love to learn and understand this stuff.

    Say you harvest a loss by selling VTSAX at $40k which had a cost basis of $43k and immediately buy VLCAX. VLCAX then proceeds to rebound back to $43k and the price stays high. As I understand things, you would want to wait a year to sell VLCAX and buy back VTSAX so that it is taxed at the long-term capital gains rate instead of ordinary income rate. Am I understanding things correctly?

    • The Mad Fientist
      December 7, 2013 at 1:06 pm

      Yes, you are exactly right. That’s why you should be just as happy investing in your alternate investment (VLCAX) as you are investing in your primary investment (VTSAX).

      Let me know if you have any other questions!

  11. Oh hai
    December 15, 2013 at 11:30 am

    Very informative post, I will definitely be doing this in the future.

    Is selling for a loss like this still worth doing if you don’t plan on reinvesting the money? I have a bond index fund that continues its downward tumble (down about $1000 so far). I’m considering cutting losses and moving it to a cash account while saving up for a house downpayment.

    Am I right in thinking I would get back whatever my tax rate was? For instance, if I sell and claim a capital loss while in the 25% bracket, would I basically be refunded $250 on my taxes (and lose $750)?

    • The Mad Fientist
      December 15, 2013 at 4:55 pm

      If you were planning on moving out of the investment anyway, tax-loss harvesting is a great way to make the pain of the loss a bit less painful.

      Your thinking is correct. Based on your tax bracket, tax-loss harvesting should allow you to turn your $1000 loss into a $750 loss.

  12. James
    January 19, 2014 at 2:50 am

    When tax harvesting, does it matter when filing taxes whether the loss/gains were short term or long term.

    Below is an example of what I have done for the 2013 period,

    Short-term gain $2,062.29
    Short-term loss -$807.17
    Long-term loss -$912.41

    Thanks,
    James

    • The Mad Fientist
      January 21, 2014 at 9:46 am

      Hi James,

      For losses, it doesn’t matter if they’re short term or long term but for gains it does. Short-term capital gains are taxed as normal income whereas long-term capital gains are taxed less.

      Looking at your numbers, it seems you will have a net $342.71 short-term capital gain, which will be taxed as ordinary income.

      When possible, you should try to hold your assets for longer than a year so that you pay the favorable long-term capital gains rate.

  13. Louise
    February 21, 2014 at 9:55 am

    Hi, I’m new to your site so not sure if anyone else has mentioned it, but if you’re planning to spend a large proportion of the year in the UK, you’ll have to be careful you don’t accidentally become UK tax resident. There isn’t a hard and fast number of days rule; it’s more if HMRC decides that the centre of your life is UK-based (amount of in time spent where, if you own property elsewhere, etc). Also look into estate planning – your UK-born wife might want to take steps to ensure she’s not subject to UK inheritance tax, as the tax-free threshold is significantly lower than the US one (although spousal transfers are exempt).

    • The Mad Fientist
      February 21, 2014 at 9:04 pm

      Hey Louise, great points. The last thing I want is to plan my US tax life out perfectly and then be blindsided by UK taxes (I used to live in the UK so I know how harsh the taxes there can be).

      Thanks a lot for the comment and I’ll let you know what I find after I’ve had the chance to investigate.

  14. Tom
    February 22, 2014 at 4:22 pm

    Such a great post, I have revisited multiple times as I have opened up Vanguard fund for myself, my parents and my girlfriend. Over the last few months I have realized that utilizing the ETF’s might be a better option then the mutual funds for some of these accounts. So maybe you know the answer to this question I have been seeking – Example – If i were to sell my shares of VTSAX and buy VTI the next day, would that count as a wash sale? (Assuming the first was at a loss).

    Thanks!
    Tom

    • The Mad Fientist
      February 22, 2014 at 4:42 pm

      Glad you enjoyed the post, Tom.

      Selling a mutual fund and then buying the ETF version of the fund is a bit of a grey area but most people consider that a wash sale.

      Therefore, you’d probably be better off either waiting at least 30 days before buying VTI or buying something that has similar performance but would not be considered substantially identical (maybe VOO or VV).

  15. Anthony Negrut
    April 10, 2014 at 9:14 pm

    After a few months of deliberations, I converted my cash savings into $25,000 of VTSAX today. I was just wondering if the market took a turn for the worse, how would automatic dividend reinvestment interfere with tax-loss harvesting? And do I have to wait 30 days before I can begin to harvest?

    • The Mad Fientist
      April 10, 2014 at 10:31 pm

      Hi Anthony, here’s how automatic dividend reinvesting could create a wash sale: Say VTSAX drops 20% so your portfolio is now worth $20,000. You decide to sell half your shares to lock in a loss off $2,500. If your dividends get reinvested automatically, it’s possible you could wash out some of those losses. For example, say a week after you sold half your shares, you received a $500 dividend payment and automatically rebuy $500 worth of VTSAX. That would mean $500 worth of your $2,500 would be a wash sale so you’d only be able to claim a $2,000 loss. Make sense?

      As far as needing to wait 30 days, you can sell VTSAX immediately if you’d like but you won’t be able to buy it back until at least 60 days have passed, due to Vanguard’s frequent trading restrictions.

  16. Pete
    May 1, 2014 at 9:48 pm

    Love this site! Couple questions on this older post: I assume this can be done with stocks in a regular taxable account? Can I do it with just selling a portion of a stock or fund holding – not selling all of it? Is there a max capital loss I can do each year?

    Thanks!!

    • The Mad Fientist
      May 4, 2014 at 5:16 pm

      Glad you’ve been enjoying the site, Pete!

      Yes, this must be done in a taxable account and you can harvest as much or as little as you want to every year (there’s no max loss you can book each year but only $3k can be deducted from your regular income so the rest has to be carried forward to future years).

  17. Wade
    June 30, 2014 at 2:38 pm

    Great article and definitely something I’d never thought about!

    Have a question, however, about how to deal with this in more long term way where I’m up on my investments overall. Say that someone bought $30,000 of VTSAX at the bottom of the market in late 2008 and early 2009. Let’s also say for the sake of this example that wherever that person bought it is the lowest the market will ever be in their lifetime. Obviously in this case, they could not just hold until it goes below the cost basis, as that will never happen. There will be many smaller market dips in that person’s lifetime, however, so what would the best strategy be for locking in these losses?

    • The Mad Fientist
      June 30, 2014 at 10:59 pm

      If your investments keep going up after buying them, you won’t be able to harvest any losses (great problem to have) but if you continue buying at different points, you should be able to harvest some of those smaller market dips you mentioned. I actually just read an interesting white paper describing the new Tax Loss Harvesting+ functionality that Betterment is now offering. They use complex algorithms to intelligently harvest some of the smaller losses your portfolio incurs throughout the year so you should read through that to see how you could lock in some smaller losses even if your portfolio is marching upwards.

  18. Tom
    September 14, 2014 at 7:40 pm

    This is good information.

    1) I was under the impression that any dividends (qualified and non-qualified) are subtracted from any realized loss. For people that are in the 15% tax bracket and would normally not be taxed on qualified dividends, are now losing some of the loss deduction benefit. Figuratively speaking, for people in the 15% tax bracket, dividends are taxed when claiming a loss.

    2) I thought that tax loss harvesting while in the 15% tax bracket only makes sense for short-term losses. Any long-term losses while being in the 15% tax bracket would result in zero deduction since the tax rate is 0% in that bracket. However, I found this post ( http://www.obliviousinvestor.com/capital-gains-and-losses-tax-short-term-and-long-term/ ) with the following example:


    EXAMPLE 3: In a given year, Jeremy has:
    $2,000 net short term capital gain and
    $3,000 net long term capital loss.

    Jeremy will subtract his LTCL from his STCG, leaving him with a $1,000 LTCL. Because this is below the $3,000 threshold, he can deduct the entire $1,000 loss from his ordinary income.

    This would suggest that even though this is a NET long-term loss, $1,000 is handled as a short-term loss which can be deducted as such.
    Any ideas?

  19. Tom
    September 15, 2014 at 9:48 am

    3) In addition to my previous comment, switching back to your preferred fund after 60 days will ensure that any dividends from the temporary fund are treated as qualified dividends. However, I think one needs to hold the fund for 6+ months in order to claim a *full* short-term loss, otherwise dividends will need to be subtracted from the loss and will count as long-term loss.

    Any thoughts on this?

    It’s probably best to do loss harvesting right in between ex-dividend dates, assuming that the portfolio is still declining.

    4) Any experience whether switching from VTSAX to its ETF cousin (or non-admiral fund) will trigger a wash sale?

    • The Mad Fientist
      September 16, 2014 at 10:27 pm

      Hi Tom, harvesting any type of loss makes sense because you can use it to reduce your taxable income (up to $3,000 per year but any excess can be carried forward to future years). I wouldn’t worry about whether your losses are short-term or long-term; you just need to worry about minimizing your short-term gains.

      Whether switching from VTSAX to VTI or VTSMX would trigger a wash sale…the guidance on what is and what isn’t a wash sale isn’t very clear but I don’t think I’d risk it (especially going from VTSAX to VTSMX).

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