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We hear a lot about "tax loss harvesting" and the benefits thereof. I could never get a solid picture of how it would work in real life over a long term of years. So I make a spreadsheet to examine it,

The idea is to occasionally sell a stock or ETF you like but which is currently sitting at a loss, to book the taxable loss. Simultaneously, use than money to buy another holding which is quite equivalent. Such as the SPY-VOO pair. (Or the same ETF at different brokers and figure it won't get noticed.)
You must not re-buy the one you sold in the next 30 days to avoid the wash-sale rule.

Some simplifying assumptions in the spreadsheet:
* The two members of the pair so closely track each other that you can do all the math using the price data of just one ETF.
* The sell decision is made at the end of every month at the close.
* All trades are made at the open of the next month (i.e., the next day).
* No friction on the trades.
* Dividends are ignored.
* The minimum holding period is 2 months. That is, no trades two months in a row, to avoid wash sales.

When a loss is booked, it is used to offset any capital gains in that year. If there is more loss than gains, up to $3000 can be used to offset ordinary income. Any excess is carried over the the next year.

The spreadsheet allows you to specify a start date and then tracks all tax loss harvesting after that date up to December 2025.

When studying the spreadsheet's output two things jump out:
1) If a buy is the lowest price that will be ever seen going forward, there is NO loss harvesting ever again.
2) Eventually a buy will be at the lowest price.

Also:
3) If the starting date is just before a BEAR market, a tax loss harvest will happen about every other month.
4) At the end of a bear market, there will be no more tax loss opportunities for a long period of time. Perhaps never again. For example, after the 2001/2002 bear market, there are no more tax loss opportunities other than 2 small ones in the 2008/2009 bear market
5) If the starting date is just before a BULL market, there will very few tax loss opportunities, perhaps none.

Examples, using SPY/SPY as the holding pair:

(BEAR)    Start date: 12/1/2000                             
Trade #   Date      Loss                Year      tax loss
1         Mar-01    -6.02%              2001      -20.69%
2         Jul-01    -1.01%              2002      -18.10%
3         Sep-01    -7.29%              2003      -3.47%
4         Nov-01    -6.37%              2004       0.00%
5         Jul-02    -6.96%              2005       0.00%
6         Sep-02    -8.52%              2006       0.00%
7         Nov-02    -2.62%              2007       0.00%
8         Jan-03     0.57%              2008       0.00%
9         Mar-03    -4.04%              2009      -8.05%
10        Feb-09    -4.33%                        
11        Apr-09    -3.73%                        

(BULL)    Start date: 1/1/2009                              
Trade #   Date      Loss                Year      tax loss
1         Apr-09    -3.73%              2009      -3.73%

(NEITHER) Start date: 2/1/2015                              
Trade #   Date      Loss                Year      tax loss
1         May-15    -0.65%              2015      -8.49%
2         Jul-15    -0.80%              
3         Sep-15    -7.03%              

Link to google spreadsheet: https://docs.google.com/spreadsheets/d/1Aablk5z9DC...

To change the start date (row) you can copy it to your own account or download it.

I ran across a tax return of a guy who sold $150K of stocks & bitcoin for a $70K gain... and sold $140K of Trump media stock he'd bought for a 50% ($70K) loss to offset it. A big part of his annual withdrawal for income... tax free due to a losing investment. Wow.

Here's a thought about the situation where you're lucky enough to buy low so that you can never book a loss again.

It seems that harvesting losses is worthwhile when they're short term, at your full regular income marginal tax rate. So if you run past the one year holding period and can no longer sell for a short term loss, maybe it pays off to sell for a long term gain, pay the long term CG tax, and start the cycle over again.

Elan

It seems that harvesting losses is worthwhile when they're short term, at your full regular income marginal tax rate. So if you run past the one year holding period and can no longer sell for a short term loss, maybe it pays off to sell for a long term gain, pay the long term CG tax, and start the cycle over again.

This subject came up when I asked if anyone had done Direct Indexing with tax loss harvesting. You target an index like the S&P 500, but only buy half the stocks, keeping a "sister" stock to trade in and out of. The example that was given to us was a simplistic buy Lowes, not Home Depot. Then if Lowes represents a loss, it gets sold and the loss harvested, using the cash to buy Home Depot. Lather, rinse, repeat with all the stocks you hold and their "sister" trade. You are buying about half the shares of a normal index initially, but may wind up selling less than the entire holding if selling a winning side of a pair in order to rebalance the account, since they are targeting a benchmark. This to me is one of the problems of the process, as it gets very complicated very quickly with the amount of stocks you hold and the number of trades executed, but you do get a consolidated 1099 from the brokerage for tax purposes. The brokerage uses a computer program to generate the movements of the account, so it's a difficult product to unwind or take over if you become unhappy with your brokerage.

Studies have also shown that the tax loss harvesting loses it's steam over time if you do not put in new money, with 10% cash input being determined to be a good amount to retain the 1-2% after fee annual return premium over an index ETF. We will easily have that spare cash to put in every year. It's clear to see why the brokerages are happy to provide this low cost approach to individuals as it encourages your putting in money consistently and leaving your money with them.

The tax loss harvesting works much better when pulling from a pool of stocks than a single ETF. You also have the choice to decide against certain industries or specific stocks, as in the tobacco industry if you feel torn about making money from addiction or a specific stock you are already overweighted in.

We talked with Vanguard, Schwab and Fidelity. At 0.2% Vanguard has the lowest fee, but seems to only be available to someone managing your money, and I am not looking to enrich a financial planner with our assets. Frankly their customer service has so totally irritated me over the years that we have decided to move our money away from them anyway. Fidelity and Schwab both start at 0.4% and go down based on dollar amounts invested in this particular investing approach. We have had money with Fidelity for almost a decade now, and have been very pleased with the free attention we get from them, with this idea having been generated by the most recent phone call from our team leader, who calls us twice a year to see how our total investments are going.

There is some overlap between brokerages in benchmarks targeted by this approach, but Schwab offers some Fidelity does not, so we will probably go with Fidelity for the International target and Schwab for the small cap direct indexing, starting with Fidelity until we feel correlation between promises and results.

Sure, you could just buy the ETF and not worry about the 1-2% premium with Direct Indexing, but there is of course an admittedly small fee with that ETF as well. We have some significant gains that we want to apply those harvested losses to and the ability to make new contributions annually. You can set up liquidation strategies if you need to draw funds from the DITLH account, which we are unlikely to touch, so instead based on current law our kids should inherit this overwhelming number of stocks with a step up in basis, which is handled by the brokerage. Wanted to make sure our kids were not going to inherit a mess.

Not every holding within an index contributes to the gain, and making even loser stocks work for us is a pleasing idea. We are also in volatile times with daily swings of benchmarks, so putting that to work makes it more tempting to put new money into the market. We are very cash heavy at this time and I would like to have that money work for me, even in what I feel to be an irrational market. Looking to make that perceived irrationality work for me as well.

To me it's a good way to make tax loss harvesting work for you, without having to have figured out what to invest in next.

IP

rayvt wrote: The idea is to occasionally sell a stock or ETF you like but which is currently sitting at a loss, to book the taxable loss. Simultaneously, use than money to buy another holding which is quite equivalent.

Beware of return reversion. Stocks with poor short-term performance tend to bounce higher. For example, starting with the S&P 500, pick the 50 stocks with the lowest return. CAGR from 1/4/2021 to 3/26/2026:

Lookback  CAGR  excess
  1008    8.0    -2.2
  504     14.5    4.3
  252     8.0    -2.2
  126     7.8    -2.4
   63     11.9    1.7
   42     17.9    7.7
   21     13.3    3.1
   10     10.8    0.6
    5     11.3    1.2
 
  RSP     10.2    0.0

P123 {S5TLH}
Universe(SP500)
FOrder("Ret%Chg(Lookback)", #Previous, #Asc) <= 50
4 week rebalance, 0% slippage

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