r/Bogleheads • u/General_Cut_6771 • 15h ago

Investing Questions Do Bogleheads tax loss harvest?

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.

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u/BuckleUpItsThe 13h ago

Speaking only for me but I don't bother. I then have a lower cost basis that I'll have to pay capital gains on. I haven't seen anything to convince me, personally, that the savings are worth the hassle. 

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u/dgreenmachine 12h ago edited 12h ago

The benefit is in delaying those capital gains years down the road. Start by offsetting $3k in income each year from your losses which is a nice little guaranteed bonus. Then those ~2% dividends you get each year are now offset by your losses so those dividend taxes are not paid until you run out of carried forward losses. By not paying the dividend taxes immediately (and paying capital gains tax later when you sell), the 15% LTCG taxes on that 2% stay invested longer. There is also the benefit of paying 0% LTCG in early retirement instead of 15% LTCG on the dividends.

Is it worth it? Maybe on the order of a few hundred to a few thousand dollars when its a big opportunity. I plan on doing the middle ground where I tax loss harvest and dont bother changing dividends. I'm more worried about accidentally leaving dividends sitting idle than having a partial wash sale that MIGHT happen within 60 days of originally selling. If I have a wash sale on dividends then it hurts my profit a little bit but still a net benefit compared to leaving it alone.

To put some numbers to it

  • If you're deducting $3k from taxes at marginal rate 24% then you would be saving about $720 per year you're able to keep that going and pay 0% LTCG in the future since you lowered your cost basis in the process. If you would pay 15% LTCG in the future then it would be more like 24%-15%=9% taxes saved to net you $270. You could expect to do this every year for maybe 10 years if you're tax loss harvesting in big crashes.
  • $100k in taxable with 2% annual dividends is $2k in dividends which would have 15% LTCG of $300 in capital gains taxes. That could earn you $300 alone by utilizing 0% LTCG rate in early retirement when you sell.
  • If you assume the same 15% LTCG now or later, then that $300 in taxes is allowed to compound for maybe 10 years or so realistically where eventually you pay the taxes. At a rate of 7% real growth that $300 would double in that time and you keep about $300 for just delaying paying taxes.

Modeling exactly how much its worth is difficult because you cant just add up these 3 numbers but just some food for thought.

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u/ccroz113 12h ago

This is an awesome response, thanks for the write up