Submitted by RealAustinNative t3_zz8vq6 in personalfinance
Are there drawbacks to tax loss harvesting in a year like this? Looking to capitalize on losses in my brokerage account this year by selling enough to fund my Roth IRA for 2023.
Edit: Not sure why this post was downvoted but thanks for sharing some considerations.
I didn’t realize this applied if you were re-purchasing similar funds in a different type of account.
I just looked this up for my own harvesting.
The IRS has some ambiguous language. You can't buy the sma fund but you also shouldn't buy a similar fund with a different name. Ie, if you swap a vanguard s and p fund for a fidelity s and p.
You can swap a total market for an s and p. That's what I did. You also can't rebuy the fund you sold. So if you have auto buys on your 401k you need to switch them.
It definitely does, and you can effectively lose the losses if you repurchase the shares in an IRA (Roth or Traditional).
A proper TLH swaps among a pair of similar but not identical funds, so being out of market isn't an issue. However, if you have suboptimal substitute, you can be stuck with it (e.g. going from total stock to S&P 500 and being stuck with it, reducing your holdings from 4000 to 500.
If you tax loss harvest (TLH) while you are in a low tax bracket, you don't save much tax.
If you TLH, your new cost basis is lower, and you reset holding period to short term. Therefore, you might find rebalancing more expensive in the next 12 months.
Also, it can be easy to mess up a TLH with wash sale if you have the same pair of funds in multiple accounts or have DRIP on.
This would be identical holdings (VTSAX) in the old and new account for this money. If I wait 30 days do I avoid a wash sale?
> This would be identical holdings (VTSAX) in the old and new account for this money. If I wait 30 days do I avoid a wash sale?
Yes. You can buy on the 31st day.
The only potential downside is if you are offsetting gains that would fall in the 0% bracket.
That is a downside, but not the "only" potential downside.
Tax loss harvesting pushes taxes down the road by lowering your cost basis. You pay less taxes now due to the loss offsetting gains and up to $3,000 of income. However your lower basis will result in more capital gains taxes layer when you sell the shares you buy while the market is down. This can be mitigated in two ways. The first is if you have a low income in the future and are in the 0% capital gains tax bracket. Then you can sell the low basis shares without having to pay taxes on them. The second is donating them if your are charitably inclined. That allows you to deduct the fair market value of the low basis shares (if you itemize) and get rid of them without paying the capital gains tax.
You still save more tax by offsetting ordinary income because the ordinary tax rates are higher than long term gain tax rates. However, if you make more than the NII tax MAGI threshold (not indexed to inflation), there's another 3.8% to consider.
The only downside is if you're in a low income year. If you are, then this year you want to harvest gains and not losses, particularly if you can do so in the 0% long-term cap gains bracket.
Otherwise, TLH is generally beneficial if you're in your working years, since it's moving some income from this year to a future year when your tax rate will probably be lower.
That being said, if you need to sell investments to fund a Roth IRA, that typically makes sense whether those investments are at a gain or a loss.
That’s a good point! I’m solidly mid career and not sure I will have the extra money for the IRA in 2023 if I don’t get it from the brokerage, so I guess my only concern here is the wash sale.
Don't repurchase the same or substantially identical security in the Roth. If you do, you will trigger the wash sale and not be able to realize the losses.
TLH basically pushes a bigger tax burden into the future. If you want to take the tax savings now and use the $$ for something, it's sensible.
I would be careful to only TLH enough to avoid carryover -- you can only negate capital gains + 3k of ordinary income each year.
Why would you want to avoid carryovers? They can be used in future years either to offset higher-taxed ordinary income or future capital gains.
Accumulating stashes of capital loss carryovers is a valuable part of a comprehensive tax-management strategy.
I rather not have to track it. I rather sell something at a gain and buy back right away.
It's pretty silly to not take full advantage of the tax savings for something that your tax software will track for you even if you are too lazy to look at last year's tax return yourself.
Because your forced to use carryover. One of the benefits of THL is you can choose exactly when to do it. With carryover it's not optional.
It's not the end of the world of course but I just prefer to avoid it.
Sure, if you are consistently going between high and low tax rate years you might want to avoid carryovers - that isn't typical though.
As for 'choosing exactly when to do it' - you don't get to choose when you actually have losses. For most people, taking advantage of those moments to transfer capital losses from offsetting lower-taxed gains (or becoming gains themselves) to higher-taxed ordinary income offers very real value that you definitely shouldn't actively avoid.
>to higher-taxed ordinary income
That's exactly my point. If I carryover losses to next year, I may be unable to use them to offset ordinary income because I have capital gains that year. It's an unknown, which is why I suggest avoiding carryover.
But I presume you are keeping them invested in investments you expect to provide gains going forward - so not realizing the losses and carrying them over would also make you unable to offset ordinary income next year...
Yes if the original investment rapidly recovers to the point it has no losses and you couldn't TLH in the next year, and all your other investments also have no losses to harvest, and you dont have significant capital gains, you'll be in a position where you missed the chance to offset some taxes on 3k or less ordinary income. That risk doesn't bother me lol
This sub is largely about simplifying financial choices, so my advice tends to revolve around simplicity
Well yes, it is quite clear you aren't in it for financial optimization so I have no doubt that not doing so doesn't bother you.
Though why that lack of interest in financial optimization on your own end would drive you to suggest others actively avoid doing so is beyond me.
Alright!
BouncyEgg t1_j2a5ebi wrote
Beware of what are referred to as "Wash Sale rules"