[djrogers]

Selling stocks at a loss is only helpful in the short term, or if you don’t think those stocks are going back up. If you harvest a loss for a tax deduction on December 31, and the stock goes back up by the end of January so you’d be even, you are way behind – because the loss only comes back to you at your highest tax rate.

[brilee]

Figuring out how to defer taxes is equivalent to receiving a free loan from the government, which can be used to profit on the float.

[vmception]

> and the stock goes back up by the end of January so you’d be even, you are way behind

there are ETFs created for the sole purpose of circumventing this, by providing exposure to the same asset or market forces

the wash sale regulation has amendment aimed at preventing this by prohibiting trades of "substantially similar securities", but I don't think it passes muster or has any teeth. you report all the trades to the IRS its up to them to figure out if your UltraShares 3x Inverse Pez Dispenser ETF is substantially similar to the Direxion one

[whitej125]

The wash sale rule has teeth. Currently, trades on a stock or direct derivative (options tied to that stock) will all trigger the wash sale rule.

I have never seen an ETF of a single security. Got an example? It would be hard for me to fathom that one could be made and remain economically viable but who knows.

ETFs however, do currently provide some loopholes with wash sales. While selling/buying AAPL within 30 days is a wash sale... selling VOO and buying IVV (both which track the S&P 500) within 30 days is currently not considered a wash sale.

You see some explanations as to why that currently is (technically those two ETFs are from different asset managers... so they have some different risks, etc). But it looks like the rule just hasn't been amended and maybe the IRS doesn't see this as prevalent enough of a case to change the tax code.

[bagacrap]

direct indexing helps with this as well --- own thousands of individual stocks that collectively act as an index, and trade in some losers for their similar competitors every time you have to realize gains

But it's not exactly the case you could pull this off with, say, Tesla, unless there's some ETF that's 99% TSLA (is there?)

[vmception]

> But it's not exactly the case you could pull this off with, say, Tesla, unless there's some ETF that's 99% TSLA (is there?)

Don't know, doubt it but its a business opportunity. It’s why there are so many ETFs, take your 20 basis points from investors and work on something else.

More likely to find an ETF that hasn't rebalanced and has a large holding of Tesla.

[whitej125]

I direct index... but I don't tax-loss-harvest the index which is what your are describing here (just noting that you can direct index and not do TLH if you want to).

[MR4D]

Not quite true.

For instance, I could sell my losses in a growth fund only to buy a different growth fund (not the same index though) and I get to stay in the market.

Ideally you would do this on day 364 of losses to maximize the tax incentive.

[djrogers]

It's not a tax incentive though - an incentive encourages you to do something, nobody is encouraged to lose money. Also, if one were to do the above, and the growth fund went up, you'd wind up paying taxes on that gain which would offset the tax deduction you took on the loss when you eventually sold it, whereas you could have just stayed in, waited for it to go back up, and you'd be at a wash.

If someone followed your advice exactly and sold on day 364 vs staying in they'd lose even more, as by the time the initial investment goes back up (after day 365) you'd be in long-term capital gains territory, which is a lower tax rate.

That's why I said it only works in the short term - eventually the gov't is gonna get it's money.

[laurencerowe]

While the benefits are limited, there are advantages:

1. Harvesting your capital losses allows you to offset other gains which may be taxable at an earlier date. $1000 today is worth substantially more than $1000 in 10 years time. 'Tax deferred is tax avoided.'

2. You can offset up to $3000 of losses a year against regular income which is taxed at a higher rate.

For me at least while it seems worthwhile to switch index funds to harvest losses when the market falls substantially the upsides aren't enough to justify the lock in of using something like Betterment's automatic tax loss harvesting features of their platform by having you invest in many individual stocks managed by their roboadvisor rather than an index fund.

[MR4D]

They are encouraging people to sell.

Most people wouldn’t care, but if you’re in a high tax bracket and you can sell one to buy another and keep your risk profile roughly the same, you’ll do it.

People prefer to pay long term gains and take short term losses. The benefits work in your favor and against the govt. The tax code reflects that, and has for a long time.

[hllooo]

it can work if you're offsetting existing short term gains and hold the replacement for >1 year, or if the stock never recovers, in which case you pull forward the deduction