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Comment by cushychicken | Hacker News Reader

Betterment's tax harvesting software got me about $3500 in realized losses which I was able to claim for my FY2015 taxes. That ended up getting me about $1500 in deductions on my tax return, while holding nominally the same securities (albeit from a different financial service supplier). Well worth the ~$250 in fees I paid them this year.

I'll probably switch over to a strictly Vanguard portfolio when that harvesting isn't saving me money any longer, but until then, I think I'll stick with Betterment.

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I think that tax loss harvesting illustrates my point. I don't know if Vanguard's service currently supports tax loss harvesting but its a feature that takes about 1 man week of work to implement.

Tax loss harvesting isn't a feature that you can differentiate yourself with.

I've implemented it several times over for the hedge funds I've worked at. Its a well understood tool that's been in use by funds for as far back as I remember.

Why doesn't Vanguard do tax-loss harvesting yet?

Excellent question, does anyone know? I'd like to know the answer as well.

I'd imagine it would be illegal for Vanguard to implement in the way that Betterment does. Betterment buys exchange traded securities to allow their customers to participate in the underlying mutual fund. They can basically jump from a Vanguard ETF to a Schwab or iShares ETF of a similar market. I'm reasonably certain it would be illegal for Vanguard to purchase a competing fund's ETF as it would be directly affecting the business of a competitor.

In fact, I'm not even sure how Vanguard could do this in any manner that would be customer facing.

> I'm reasonably certain it would be illegal for Vanguard to purchase a competing fund's ETF as it would be directly affecting the business of a competitor.

I can buy whatever companies ETF I want with my Vanguard account. Why would it be illegal?

I'm referring to their mutual fund, not purchases you make on their trading platform.

> 1 man week of work to implement.

A more realistic estimate is probably 6 people for 2 years. Plus increased support costs. Large financial companies are often ridiculously slow to roll things out, but as a customer you want risk aversion not bugs.

> but its a feature that takes about 1 man week of work to implement.

A good example of how estimates in software are usually off by large factors. Determining the best exit point to harvest a loss at, for example, would probably take more than a week. And that is just one small piece of the model.

As I mentioned in a few child comments, I don't think Vanguard can implement tax loss harvesting in a way that's customer facing at all. They certainly can't implement it in the way that Betterment does - that would involve purchasing competing mutual funds' ETFs, which I'm sure the SEC would view as anticompetitive.

I suppose you could do something like that within a sector - trading an Amazon for an Apple in tech, or a Shell for an ExxonMobil in oil - but that's betting on a lot of independent factors besides the performance of the commodity or sector as a whole.

Buying "nominally the same securities" is exactly the reason why tax-loss harvesting is borderline illegal. It goes directly against the IRS warning on "substantially identical" securities.

http://www.investopedia.com/exam-guide/series-7/investment-r...

Betterment's burden to bear, not mine.

That's not how law works.

I never really understood tax harvesting. People act like it's free money, but it just seems like tax deferral to me. Sure, you get nearly the same securities - but you get them at a lower cost basis, so you'll have to pay more capital gains tax later, assuming you sell them at a gain.

I suppose you could think of it as an interest-free loan (by getting your deduction now rather than lower taxes later), so maybe it does make sense. Personally, I'd much rather pay my taxes now, while I'm earning an income, and maximize the amount of my retirement savings that I'll actually get to spend without having a mysterious tax bill hanging over my head. I prefer Roth IRA to traditional for the same reason.

> $3500 in realized losses... $1500 deduction

Someone please correct me if I'm wrong, but it seems silly to harvest more losses than the capital loss deduction limit ($1500)! That's $2000 worth of higher cost basis that were basically "thrown away" rather than saving you ($2000 * ~15%) on your eventual gains taxes, no?

> more losses than the capital loss deduction limit ($1500)

Currently you can deduct up to $3000 of short term capital losses per year against other types of income (e.g. regular employment income), and any remaining balance can be carried forward indefinitely.

I got the $1500 number from the OP, not sure where it came from. I didn't realize losses could be carried forward like that though, good to know!

I am guessing OP was able to decrease his/her taxes owed by $1500 (e.g. by deducting marginal income by $3000 at a combined state and federal marginal tax rate of ~50%).

*Edit: or, as cbhl points out below, OP is married filing separately, in which case the deduction limit is $1500/year (multiplied by marginal tax rate to yield actual tax savings).

> $3500 in realized losses

> $1500 in deductions

Do you mean $1500 in credit? why wouldn't all $3500 be deductions?

> Well worth the ~$250 in fees I paid them this year.

Will this work every year, even in bull markets?

> Do you mean $1500 in credit? why wouldn't all $3500 be deductions?

Frankly, I'm not sure. I did it through Turbotax a week ago and didn't look closely at it.

> Will this work every year, even in bull year?

As long as you have a security that you can sell at a loss with a comparable security to replace it - yes.

> If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.

https://www.irs.gov/uac/Ten-Important-Facts-About-Capital-Ga...

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