Just over a month ago, we were dealing with wild stock market swings in the wake of the debt ceiling debacle, and market indices had fallen to levels where many of us were carrying paper losses. I thus suggested that it might be a good time to harvest some losses for tax purposes.
Harvesting our losses
I’m not sure about you, but I followed through and harvested a significant chunk of losses. The beauty of this is that you can carry unused losses forward indefinitely, and you can also use your losses to write off $3k/year in ordinary income, which is taxed at a higher rate than long-term capital gains.
Assuming a federal rate of 25% and assuming a state income tax rate of 6%, that $3k/year tax break works out to an annual savings of $930. And that will continue until we’ve used up our losses. Not bad for a few minutes work.
Anyway… When I made these moves, I ended up shifting money from the Vanguard Total Stock Market Index (VTSAX) into the Vanguard Large Cap Index (VLCAX). Thus, we were never out of the market, meaning that we’d be fully invested in the event of a quick rebound. While these two funds track each other rather closely, they follow different indices, so we’re also safe when it comes to avoiding a wash sale.
To make things easier on the back end (more below) and to avoid trouble with Vanguard’s frequent trading policy, I then converted our mutual fund shares into the equivalent ETF (i.e., I converted VLCAX into VV).
Returning to the issue of wash sales… To avoid triggering a wash sale, we weren’t able to move back into the Total Stock Market Index for 31 days (not counting the original trade date). Given that our original sale was made on August 10th, and that there are 31 days in August, we had to sit in VV until at least September 10th.
Note: To determine your wash sale window, simply pull out a calendar and count forward (or backward) 31 days starting with the day after (or before) your transaction date.
Making the roundtrip
While I’m comfortable with holding VV for the long term, my preference would be to get back into VTI (the ETF equivalent of the Vanguard Total Market Index Fund) if we could do so without incurring any gains. And guess what? Given the recent performance of the stock market, we’re not too far from being able to make that happen. Depending on how things go today, it might have even happened by the time you read this.
Assuming that I can make this roundtrip work, I will have banked a bunch of losses and our portfolio will look exactly as it did before the process started (albeit with some ETFs in place of regular mutual fund shares). While I’m not particularly interested in generating losses (who is?), we might as well make a bit of lemonade when the market hands us lemons.