When you harvest a tax loss, you sell fund A at a loss and buy fund B. You can’t buy back fund A for 30 days, or else you create a wash sale which negates the loss you took. After you clear the 30 days, then what?
Fund B Is Down
If fund B is down, it’s easy. You sell fund B at a loss again and buy fund A. You add to your harvested tax loss.
Fund B Is Up
What if fund B is up? If it’s up a lot, more than the loss you took from fund A, you stay in fund B. Going back to fund A now will defeat your tax loss harvesting move. What if fund B is up some, but not enough to completely wipe out the loss you harvested?
You can stay in fund B and wait for it to turn a loss. It may never happen. If fund B keeps going up you are stuck with it.
Or you can complete your round trip and call it a day. You realize a small short-term capital gain on fund B, which offsets some of your harvested loss from selling fund A.
Dividend From Fund B
Dividends also get in the way. If while holding fund B you receive a dividend from it, selling fund B within 60 days from buying it will turn an otherwise qualified dividend into a non-qualified (“ordinary”) dividend. Ordinary dividends are taxed at a higher rate than qualified dividends.
I’m in this situation now. I sold fund A at a loss and bought fund B. The 30-day window cleared. Fund B was up some, but not a lot. I also received a dividend from it during that window.
Should I sell fund B and get back to fund A now?
Selling fund B now will make me lose some of the harvested loss from selling fund A. It will also increase the tax rate on the dividend received from fund B. Selling after another month to keep the dividend qualified may make me lose more of the harvested loss. Would that be penny-wise pound-foolish? Or should I forget about going back to fund A and just stay in fund B?
I decided to wait until the dividend gets qualified. I don’t want to lose the bird in hand (loss aversion bias). Let’s see what happens in another month.
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