Over at Bogleheads we came across the following dicussion: Is Tax Loss Harvesting Ever a Bad Idea?
by allocator » Tue Sep 23, 2014 5:01 pm
by technovelist » Tue Sep 23, 2014 5:03 pm
by Beliavsky » Tue Sep 23, 2014 5:14 pm
by dodecahedron » Tue Sep 23, 2014 5:15 pm
by House Blend » Tue Sep 23, 2014 5:18 pm
by cheese_breath » Tue Sep 23, 2014 5:20 pm
by technovelist » Tue Sep 23, 2014 5:22 pm
by technovelist » Tue Sep 23, 2014 5:23 pm
by dodecahedron » Tue Sep 23, 2014 5:29 pm
by technovelist » Tue Sep 23, 2014 5:32 pm
by mhc » Tue Sep 23, 2014 5:35 pm
by House Blend » Tue Sep 23, 2014 5:39 pm
by happymob » Tue Sep 23, 2014 7:07 pm
by kaneohe » Tue Sep 23, 2014 8:21 pm
by allocator » Wed Sep 24, 2014 7:51 am
by larryswedroe » Wed Sep 24, 2014 8:42 am
by cheese_breath » Wed Sep 24, 2014 9:30 am
by Riceman » Wed Sep 24, 2014 10:21 am
Is tax loss harvesting ever a bad idea?
by allocator » Tue Sep 23, 2014 5:01 pm
Setting aside the harvesting of small or negligible losses, assuming transaction costs are low and there are ready TLH "partners" (e,g., VBR/IJS), is a TLH ever ill-advised?
Thanks!
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Re: Is tax loss harvesting ever a bad idea?
by technovelist » Tue Sep 23, 2014 5:03 pm
Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Is tax loss harvesting ever a bad idea?
by Beliavsky » Tue Sep 23, 2014 5:14 pm
allocator wrote:Setting aside the harvesting of small or negligible losses, assuming transaction costs are low and there are ready TLH "partners" (e,g., VBR/IJS), is a TLH ever ill-advised?
Yes, since the tax rates on long term capital gains are lower than those on ordinary income.
Up to $3000 of capital losses can be used to reduce taxable income. Since ordinary income tax rates exceed long term capital gains rates, if you have already realized say $9000 in long term capital gains this year, and you have $9000 in potential capital losses to realize, it may be better to defer the capital losses until next year so that they can be used to reduce taxable income over the next three years rather than offset capital gains for this tax year.
Last edited by Beliavsky on Wed Sep 24, 2014 9:01 am, edited 1 time in total.
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Re: Is tax loss harvesting ever a bad idea?
by dodecahedron » Tue Sep 23, 2014 5:15 pm
Another reason a TLH could be ill-advised is if it would turn otherwise qualified dividends into unqualified dividends.
Example: You bought VEA on August 11. It went ex dividend this week. If you TLH before you have satisfied the 60-day (out of 121 day) holding period, you will turn that qualified dividend (taxed at a preferential rate, possibly 0%) into an unqualified dividend (taxed as ordinary income at a higher rate.)
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Re: Is tax loss harvesting ever a bad idea?
by House Blend » Tue Sep 23, 2014 5:18 pm
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
No.
Even if you are permanently in the 0% tax bracket, there's no harm in TLH. (But it doesn't help, either.)
And if you are in (say) the 15% Federal bracket (so, 0% LTCG), having losses harvested is a big plus: you could get to deduct $3000 of those losses against ordinary income, giving you $450 immediate tax savings. Plus potential state income tax savings, depending on the state.
Here's one scenario where it could bite. In general, once you get beyond the level of deducting $3000 against ordinary income, you are postponing long term capital gains into the future. And usually this is a good thing. But it could backfire if your future LTCG rate is higher than it would have been if you had realized gains sooner.
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Re: Is tax loss harvesting ever a bad idea?
by cheese_breath » Tue Sep 23, 2014 5:20 pm
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
Agree with the second half, but I wonder about the first half. I wonder if you're basing this on the idea that a loss in a low bracket produces less tax savings than the same loss in a higher bracket??? But maybe to someone in a lower bracket a lesser tax savings might be just as important as a larger savings to someone in a higher bracket.
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Re: Is tax loss harvesting ever a bad idea?
by technovelist » Tue Sep 23, 2014 5:22 pm
House Blend wrote:
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
No.
Even if you are permanently in the 0% tax bracket, there's no harm in TLH. (But it doesn't help, either.)
And if you are in (say) the 15% Federal bracket (so, 0% LTCG), having losses harvested is a big plus: you could get to deduct $3000 of those losses against ordinary income, giving you $450 immediate tax savings. Plus potential state income tax savings, depending on the state.
Here's one scenario where it could bite. In general, once you get beyond the level of deducting $3000 against ordinary income, you are postponing long term capital gains into the future. And usually this is a good thing. But it could backfire if your future LTCG rate is higher than it would have been if you hadn't harvested the losses.
I would say that there is harm if you have gains that would go in the 0% bracket and you take a loss that cancels out those gains. Why not save the losses until next year? Otherwise you lose the possibility of tax gain harvesting this year.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Is tax loss harvesting ever a bad idea?
by technovelist » Tue Sep 23, 2014 5:23 pm
cheese_breath wrote:
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
Agree with the second half, but I wonder about the first half. I wonder if you're basing this on the idea that a loss in a low bracket produces less tax savings than the same loss in a higher bracket??? But maybe to someone in a lower bracket a lesser tax savings might be just as important as a larger savings to someone in a higher bracket.
Yes, a tax savings in a lower bracket is less than in a higher bracket, by definition, for the same amount of loss. And of course tax savings in the 0% bracket don't amount to much at all. 
In theory, theory and practice are identical. In practice, they often differ.
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Re: Is tax loss harvesting ever a bad idea?
by dodecahedron » Tue Sep 23, 2014 5:29 pm
technovelist wrote:
cheese_breath wrote:
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
Agree with the second half, but I wonder about the first half. I wonder if you're basing this on the idea that a loss in a low bracket produces less tax savings than the same loss in a higher bracket??? But maybe to someone in a lower bracket a lesser tax savings might be just as important as a larger savings to someone in a higher bracket.
Yes, a tax savings in a lower bracket is less than in a higher bracket, by definition, for the same amount of loss. And of course tax savings in the 0% bracket don't amount to much at all. 
Depends on what you mean by the "0% bracket." If by "0% bracket" you mean that the taxpayer is facing statutory bracket rates of 15% on ordinary taxable income and 0% on LTCG taxable income, then there could still be a tax benefit associated with TLH. The reduction in AGI attributable to TLH might enable the taxpayer to qualify for a variety of tax breaks (credits and deductions and other tax preferences that phase out with modified AGI), might reduce their state income tax liability, and might enable them to qualify for lower Medicare premiums, property tax breaks, and a variety of other government benefits that are contingent on AGI or MAGI rather than just taxable income per se.
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Re: Is tax loss harvesting ever a bad idea?
by technovelist » Tue Sep 23, 2014 5:32 pm
This is very complicated. See http://www.arahcpa.com/blog/fine-tuning ... osses/9110 for a discussion by a CPA.
In theory, theory and practice are identical. In practice, they often differ.
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Re: Is tax loss harvesting ever a bad idea?
by mhc » Tue Sep 23, 2014 5:35 pm
allocator wrote:Setting aside the harvesting of small or negligible losses, assuming transaction costs are low and there are ready TLH "partners" (e,g., VBR/IJS), is a TLH ever ill-advised?
Thanks!
Watch out for transactions in tax-advantaged accounts that could make you lose the capital loss permanently. Sell fund A in taxable for loss and buy fund A in IRA. My understanding is the tax loss is gone. I know you mentioned proper TLH pairs, but just wanted to make sure this is covered.
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Re: Is tax loss harvesting ever a bad idea?
by House Blend » Tue Sep 23, 2014 5:39 pm
technovelist wrote:
House Blend wrote:
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
No.
Even if you are permanently in the 0% tax bracket, there's no harm in TLH. (But it doesn't help, either.)
And if you are in (say) the 15% Federal bracket (so, 0% LTCG), having losses harvested is a big plus: you could get to deduct $3000 of those losses against ordinary income, giving you $450 immediate tax savings. Plus potential state income tax savings, depending on the state.
Here's one scenario where it could bite. In general, once you get beyond the level of deducting $3000 against ordinary income, you are postponing long term capital gains into the future. And usually this is a good thing. But it could backfire if your future LTCG rate is higher than it would have been if you hadn't harvested the losses.
I would say that there is harm if you have gains that would go in the 0% bracket and you take a loss that cancels out those gains. Why not save the losses until next year? Otherwise you lose the possibility of tax gain harvesting this year.
Agreed. If you start with the assumption that you already have realized gains, then 0% LTCG taxes would induce you to postpone taking losses. Beliavsky's example is in the same spirit.
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Re: Is tax loss harvesting ever a bad idea?
by happymob » Tue Sep 23, 2014 7:07 pm
technovelist wrote:
House Blend wrote:
technovelist wrote:Yes, if you are in a very low tax bracket, it probably doesn't pay to tax loss harvest, especially if you have gains the same year that would go in the 0% LTCG bracket.
No.
Even if you are permanently in the 0% tax bracket, there's no harm in TLH. (But it doesn't help, either.)
And if you are in (say) the 15% Federal bracket (so, 0% LTCG), having losses harvested is a big plus: you could get to deduct $3000 of those losses against ordinary income, giving you $450 immediate tax savings. Plus potential state income tax savings, depending on the state.
Here's one scenario where it could bite. In general, once you get beyond the level of deducting $3000 against ordinary income, you are postponing long term capital gains into the future. And usually this is a good thing. But it could backfire if your future LTCG rate is higher than it would have been if you hadn't harvested the losses.
I would say that there is harm if you have gains that would go in the 0% bracket and you take a loss that cancels out those gains. Why not save the losses until next year? Otherwise you lose the possibility of tax gain harvesting this year.
Because you can't save all the losses. $3000 of loss will be burned every year, even if you are in the 0% tax bracket. Granted, you may still be able to take advantage of that $3000 (by tax-gain harvesting or converting $3000 of a traditional IRA to a Roth IRA), but when in a very low tax bracket, TLH is not quite as automatic of a benefit.
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Re: Is tax loss harvesting ever a bad idea?
by kaneohe » Tue Sep 23, 2014 8:21 pm
happymob wrote:$3000 of loss will be burned every year, even if you are in the 0% tax bracket.
If you have very low income, you must "use" 3K of loss each yr but you do not necessarily lose it. You need to use the capital loss carryover worksheet to figure how much of the capital losse survives for the next year. Try using the worksheet with very low income............
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Re: Is tax loss harvesting ever a bad idea?
by allocator » Wed Sep 24, 2014 7:51 am
Clearly, I should have noted that we are in the 39% federal bracket and live in a high-tax state. Nonetheless, thank you all for the VERY helpful and informative responses and discussion.
Very best!
A
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Re: Is tax loss harvesting ever a bad idea?
by larryswedroe » Wed Sep 24, 2014 8:42 am
Key to remember is TLH resets basis to now lower level, so unless get stepped up basis on death you get time value, interest free loan from government. So worth more in higher interest rate environments.
Also then depends as others note you don't want to take losses in low tax bracket and then pay taxes in high tax brackets. All issues need to be considered
Larry
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Re: Is tax loss harvesting ever a bad idea?
by cheese_breath » Wed Sep 24, 2014 9:30 am
If you're always in the 15% bracket or lower you can harvest losses and get your tax reduction one year and then tax gain harvest to raise your basis back up in succeeding years, possibly with no additional federal tax liability so long as you don't go above the 15% bracket. But if you're collecting SS it may increase the percentage of your SS subject to taxes. (Note: the percentage of your SS subject to taxes may be reduced in the year you claim the loss.) Also, depending on your state you may be liable for state taxes. Still, for some individuals it may work. In my particular situation I believe it would work, but as Larry says "all issues need to be considered".
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Re: Is tax loss harvesting ever a bad idea?
by Riceman » Wed Sep 24, 2014 10:21 am
I do the exact strategy described by cheese breath. If you harvest losses during a year when you harvest gains, there is potential downside (no losses available when you want to harvest in the future at a higher bracket, or during an odd loss harvesting year) with no potential upside.
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