No. of Recommendations: 10
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.
