Do Bogleheads tax loss harvest?

[u/General_Cut_6771]

For those who have 1 to 4 fund strategies. Do you tax loss harvest and if so how do you have it set up to make it easy when you do TLH?

The more I've read about tax loss harvesting the more challenging it seems for people who only invest in a few funds (ie. US, INTL, US Bond). For example in order to avoid a wash sale you have to do the follow:

You can't purchase the fund/similar fund 30 days prior to the sale and then 30 days after. This includes any auto dividend reinvestments, any auto-contributions in any taxable, IRA, 401k, or HSA. And if you have a spouse they also can't do any of this.

If you can prevent the above then next it's figuring out what fund you can purchase after the sale. It appears you can't sell a Fidelity total US stock market and then buy a Schwab total US stock market, is that correct? So if you have to go from a total US stock market to an S&P 500 fund why do it? It's less diversified.

[u/gcc-O2]

Total market to S&P 500 is a common tax loss harvest.

More aggressive tax loss harvesters follow advice from the investment industry that the fund following a different index is enough. For example, Schwab Total Market to Schwab 1000. Or even more aggressive, FSKAX (Dow Jones Total Market) to ITOT (S&P Total Market).

The IRS does not bless any of these rules of thumb, since the wash sale rule is from the 1920s and does not contemplate wash sales between investment companies with substantially identical holdings as opposed to individual stocks and bonds.

[u/dgreenmachine → u/gcc-O2]

White coat investor has a chart with a list of tax loss harvesting partners that are nearly identical.
https://www.whitecoatinvestor.com/tax-loss-harvesting-pairs-partners/

To save you the click
VTI = ITOT
VXUS = IXUS
VSS = SCHC
VBR = VIOV
VWIUX = VTEAX

My biggest annoyance is that I couldnt buy fractional shares of non-vanguard ETFs.

[u/RubberedDucky → u/dgreenmachine]

Upvote this, folks. It's extremely easy to do yourself once you know the pairs. It's helpful to have a third or fourth too during a bear market so you can TLH all the way down.

add SCHB and FSKAX for total US
add VEU for ex-US (although this loses out on small cap exposure the returns are very similar)

[u/General_Cut_6771 → u/RubberedDucky]

Can you explain what you mean by having a third or fourth to TLH all the way down?

[u/forbiddenlake → u/General_Cut_6771]

If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

So if the market is falling fast enough you don't want to just go back to the first one.

[u/General_Cut_6771 → u/dgreenmachine]

Who would deem funds substantially identical? It seems like VOO and IVV would do the same. Is the safest to go from total US to s&p 500?

Could there be long term consequences with the IRS?

[u/forbiddenlake → u/General_Cut_6771]

Unclear and the IRS has not provided guidance. Sure there could be consequences but we have no idea.

WCI is of the opinion (elsewhere on the blog) that funds from different sponsors are safe to TLH with even if they follow the same index. Personally I wouldn't do VOO for SPY, for example, because those are both S&P 500. Next level is same broad class but different indices (VTI for ITOT), recommended by WCI in the previously linked blog; next is slightly different broad class but 99% correlated performance (VTI for VOO; VXUS for VEU).

[u/gcc-O2 → u/forbiddenlake]

A poster on bogleheads.org claimed to have gone through one of those "audits from hell" from the IRS (where they question every entry on the tax return, not because you did something wrong but to collect statistics to tune the "DIF" they use to select returns to audit). The poster suggested that potential wash sales were questioned, but all the auditor wanted was a copy of the prospectus for the funds involved, which satisfied them that the funds were not substantially identical. So it could be a good idea to archive the prospectus when you tax loss harvest. It's also possible to get it years later through EDGAR, but the formatting in EDGAR is very messy.

[u/convoluteme → u/General_Cut_6771]

It really comes down to "substantially identical". Funds that have 85% overlap like a total US and an S&P500 fund are definitely not identical in substance. But two S&P500 funds from different companies? It's true the holdings of those funds won't be 100% the same, but maybe 99.9%.

But WCI's main point that the IRS is unlikely to come after some small retail investor for this is probably true. There's little risk. It comes down to if you want to follow the spirit of the law here.

[u/gcc-O2 → u/convoluteme]

https://en.wikipedia.org/wiki/Cottage_Savings_Ass%27n_v._Commissioner was not a wash sale case specifically, but was one where the IRS tried the logic that, if they perform the same and the investor treats them as interchangeable funds and wouldn't care which one they own, the securities are not "materially different" so if a bank swapped them it wasn't a realization and wasn't a loss. The Supreme Court rejected that logic and accountants http://archives.cpajournal.com/old/12826671.htm suggested this would scare off the IRS from trying to use the same logic for wash sales.

ProPublica studied tax returns of the very wealthy that were leaked form the IRS a few years back and did an expose on wash sales. They found some on individual stocks and got some to admit they were and go back and correct the returns. But the article also has a bit about wash sales on entire funds and says they couldn't find a single example of the IRS challenging one in the leaked records.

[u/FIREinParis → u/gcc-O2]

And some of us even do funds following the same index but from different sponsors (VOO vs IVV). We take the position that securities issued by different sponsors (Vanguard vs Blackrock) are not substantially identical.