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With the big market drops, I'm thinking of doing some tax loss harvesting. I've never done this before, so want to make sure I do it right... I'm on Fidelity if it matters.

I have a self managed portfolio of ITOT (S&P 500 index), IXUS (Intl index), IYR (REIT index), and AGG (bond index).

IXUS has taken a beating this year, so I'm planning on selling the lots with a loss, and replacing it with VXUS.

Should I also realize some gains (e.g., sell ITOT for VTI) so that I have some actual capital gains to offset? Or should I just use the losses to offset the taxes on my wages?

Other than the wash rule, anything else I need to be aware of?

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I would not realize gains unless:

  • You believe that it's time to exit a fund for defensive reasons

  • You want to rebalance your allocation

If you are having dividends reinvested, be aware that it can trigger a wash sale violation when a loss is realized. Either work out the ex-dividend dates and avoid the 60 day window around the loss date or turn off the DRIP.

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The greater benefit long term is “not” taking gains in same year unless you specifically want to sell those shares to get out of the position.

You can use up to $3000 in losses against ordinary income. And in a different year, take advantage of the long term cap gain rates.

To be clear, I am suggesting you avoid taking a loss to offset a gain that otherwise might have a favorable rate.

All that said, never let the tax tail wag the investing dog.

  • Joe, could you expand on this: "To be clear, I am suggesting you avoid taking a loss to offset a gain that otherwise might have a favorable rate." Let's say I already have a gain for the year with a 15% cap gains rate. Even if I'm able to take a loss to delay paying that tax, you are saying that I shouldn't? – Jeff O'Neill Oct 31 '18 at 13:12
  • Yes. An earner in the marginal 25% bracket, and 15% LT gain rate. If you take a $3K gain and $3K loss in same year, the net is zero tax. If you take the loss against ordinary income, you save $750, and take the gain in the next year, $450 tax due, you net $300 this way. If $300 is of little consequence, no issue. I am just pointing out that timing matters. Using losses to offset short term gains is also a good thing. – JoeTaxpayer Oct 31 '18 at 13:18
  • Regarding this: "If you take a $3K gain and $3K loss in same year, the net is zero tax." That seems like a good thing since I can delay paying tax on the already realized gain (caused by rebalancing) until retirement, which is 20 years away. – Jeff O'Neill Oct 31 '18 at 13:28
  • But re-read my comment, take loss now, and gain in Jan. You will get $750 from this year's tax return, and owe just $450 for tax year 2019. – JoeTaxpayer Oct 31 '18 at 13:30
  • That makes sense, but in my situation (i) I've already realized the gain and (ii) the gain is much more than $3k. Though you make a good point for a more general situation. – Jeff O'Neill Oct 31 '18 at 14:09
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I'm going to expand on Bob's accurate but concise answer because I had to do a bit of research to understand it all.

For tax loss harvesting, people often quote the wash sale rule as you can't rebuy the security you sold within 30 days. But, the window also applies in reverse! You can't have bought the security in the previous 30 days as well so in reality it is a 61 day window that you need to be careful of.

Another thing to be aware of is that the wash sale rule applies to your spouse as well. If I sell an ETF, and my wife buys the same investment within 30 days, then the wash sale rule applies.

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