I am sure a large amount of people are just like me wondering what, if anything, they should do as the year closes out to take full advantage how much you owe in taxes. I know this is the first year I have learned about the Financial Independence movement and I am excited to document what I am doing so I can look back on it a few years from now and thinks of many mistakes I made.
Step 1: Look at all my taxable accounts to see how everything has performed for the year. This has been a terrible end of the year for the stock market, BUT this is exactly what I was hoping would happen early on in my path to financial independence. The more I continue to dollar cost average and continue purchasing index funds while the market goes down, the more shares I will buy.
Account 1: Vanguard Holdings
Now let’s look at how the actual accounts did to see if we have any room to do some tax optimization!
Well that is a part of the game. Total losses for first taxable account: -$19,887.52
Now time to look at my E Trade account:
One of the biggest mistakes I made over the course of my investing has been getting into BitCoin. Looking back, I was a dumb and naïve young investor and I have tried to turn it around for the better. I have sold all my shares of the GBTC, but unfortunately lost over $8k in the stock…this isn’t to mention what I lost in actual purchasing of Bit Coin.
Now to look at my current positions on my E-Trade account:
The only stocks that I am going to be able to sell and re-buy to increase my Cost Basis are going to be CF (+$255.85), GNKWF (+$5.80), and WMT (+$1,046.55).
- Total Gains: +$1,308.20
- Total Losses: -$10,525.32
Total Taxable Accounts Summary
Step 2: Now that I have a good understanding of how my accounts have performed, I need to determine the best next steps to take. From my understanding of tax loss harvesting, there are three main things I can do. First, I am going to ensure dividends are not automatically re-invested to prevent a wash sale. A wash sale, from my understanding, is an elimination of getting any tax benefits if you sell something for a loss and then immediately buy it or something like it back. If done you would not be able to harvest any losses for tax purposes. Second, because all my vanguard account is invested in VTSAX, I am going to find another fund I can purchase that will prevent a wash sale. After doing some research, the fund that I have decided to purchase is VLCAX. This is the Vanguard Large Cap Index. From everything I am reading these two funds are different enough to ensure the IRS would not see this as a wash sale. Now it is time to sell my VTSAX and buy VLCAX in each account. Third, I will sell any accounts I have made a gain on and re-purchase the individual share. This will be very easy this year as there aren’t many shares I have made money on.
Selecting all the available shares from my VTSAX taxable account. Note I have setup my account to be able to sell by individual times purchased in order to better harvest gains/losses.
Moving investment to VLCAX
Step 3: Purchase back the VTSAX fund after 31 days to ensure it isn’t considered a wash sale. Since today is Christmas and the markets are closed, the actual purchase of the fund will happen on 12/26 meaning that I can purchase the shares back on 1/28/19. This will ensure I can take advantage of tax lost harvesting.
Step 4: Coming home for the holidays, I found out that I also have a large amount of bonds relatives purchased for me years ago. After doing some research I found that bonds are treated as capital gains if you sell them before the full maturity date. Since I have so much in losses that I can harvest, I can offset some of the losses by all the gains from the bonds. This is the perfect year to do this because I will still have losses after accounting for the interest earned on the bonds. Below is a snapshot of the bonds I have. I found the estimated value of the bonds at this website by putting in the bond number and issue date: https://www.treasurydirect.gov/BC/SBCPrice
So now I will be able to claim $4,324.64 in gains from interest earned on the bonds.
Full Summary: I know this post has a lot of content in it so I am going to do a really high level overview of what I have done and provide specific numbers
- Determined total amount of gains/losses in my taxable accounts
- $19,887.52 in losses from Vanguard
- $9,217.12 in losses from E-Trade
- Looked for a Vanguard fund to purchase after selling my VTSAX to prevent a wash sale. Landed on purchasing VLCAX.
- Sell any taxable account stocks that have increased in value from my E-Trade account
- I will end up selling and re-purchasing CF (+$255.85), GNKWF (+$5.80), and WMT (+$1,046.55) for total gains of $1,308.20
- Sell positions in bonds I currently hold to harvest gains of $4,324.64
- Able to reduce taxable income by $3,000 for this year based off current tax limitations. Since I am in the 24% tax bracket, this will save me $720 in taxes this year
- I will be able to carryover $27,780 of losses going into the future so this will be able to save me more money in the future. I think I will be in the 35% tax bracket for next year, so if I max out $3k/year then I will be able to take the max amount of losses for the next 9 years. This means I would end up saving $1,050 per year for the next 9 years totaling up to $9,450!
Dang, putting this together was a lot of work but I really hope someone can read through it and action on some of the things I did. Please note that everything outlined here is what I have done. I am by no means advocating others to do this or giving tax advice. I am just documenting exactly what I am doing in order to try and reduce my taxes this year!
Let me know what you think and how you are going to crush the game in taxes closing out this year!