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Personal Investments • Using up large accumulated capital loss with treasury ETFs

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Late to the party.  I think this is correct.  Corrections requested so I learn and don't mislead.


Brilliant work, OP.  Thanks.


Noticed many questions so gathered some background information to hopefully clarify OP's technique.


Dates: Declaration Date, Ex-Dividend Date, Record Date, Payable Date:
See: https://www.investopedia.com/ask/answer ... d-date.asp
See: https://www.investopedia.com/terms/r/recorddate.asp


Tax reporting.
--STCG from our selling: reported on 1099B, processed on Sch D, offset by carryover loss, net ($0-$3K) flows to 1040 line 7, reduces taxable income.*
--STCG from internal fund operation: reported on 1099DIV box 1a, processed on Sch B, flows to 1040 line 3b (ordinary dividends), adds to taxable income.

* OP's technique vs state tax return.  Fed taxable income (2023 1040 line 15) is first input to (my) state taxable income.  So OP's selling (tax gain harvest**), offset by carryover losses, is ignored by fed tax return (not part of fed taxable income), so not added to state taxable income.  Meaning it receives same tax benefit as a single-state muni fund---fed/state tax exempt---maybe better tax treatment than a single-state muni since SS IRMAA MAGI adds back muni dividends but not offset CGs (don't know about ACA).  Brilliant.


** Tax gain harvest.  Selling to harvest a CG instead of a dividend, is a recognized wiki strategy.
See "Tax gain harvesting": https://www.bogleheads.org/wiki/Tax_gain_harvesting

OP's use of carryover losses to offset tax gain harvest is a logical use of wiki topic.


BH advice: don't harvest CG with carryover loss. OP's harvesting of STCGs gain would seem to an exception to general BH advice to not harvest CGs with a carryover loss; the reason being:
--We CAN control when we harvest a CG, we can't control when we received income---better to save carryover loss to offset what we can't control.
--If we have limited amount of carryover loss, offsetting harvested (tax benefited) LTCG or STCG, it could better be used to offset (no tax benefit) $3K of ordinary income.

OP's technique's annual benefit is much more than that---unlimited carryover loss offsetting large CGs* + $3K of ordinary income.  Brilliant.

* OP's only limiting factor would seem to be the amount of principal he has to rollover each month.


It would seem the only things required to make this strategy run well/smoothly are:
--Large carryover loss---not planned to use for another purpose.
--Large principal to rollover each month.
--An inverted-yield interest-rate environment to boost return of ST bonds.
--ST bond fund/ETF (minimize interest-rate risk) that embeds dividends in NAV---M* price chart exhibits a clear saw-tooth pattern.
--Bond fund/ETF distribution schedule---to guide selling/buying.
--Ensure sale proceeds have settled to pay for next purchase---verify brokerage requirements.



Downside.  This strategy will be less effective (invested principal will produce less after-tax income vs ...LT muni?) when ST bond yields revert to normal. But it's a handy technique to have during inverted-yield environments.

Idea.  Need to monthly check SGOV's SEC yield vs your alternative (favorite muni's taxable-equivalent yield?) to know when to change course.

Wish I'd learned of OP's technique sooner.

Statistics: Posted by dratkinson — Sat Sep 21, 2024 12:27 am — Replies 45 — Views 10119



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