Updated June 15, 2023
Today (March 9, 2020) I decided it was time to cuddle up to Mr. Bear and let him help me avoid some capital gains taxes.
As regular readers here know, for the past few years we have been homeless and nomadic. It is a lifestyle that agrees with us and one we’d like to keep doing for sometime. However, at some point age will force us to settle down. The trick is deciding when exactly that is.
Act too soon and we miss out on extra wandering. Wait too long and I might not have the energy left to easily make the transition. But sometime in the next five years there is a better than even chance we will be buying a “final years” house.
To that end, we’ve had money growing in a taxable account invested in, of course, VTSAX. As I tracked this against the eventual sale to fund the house, I realized that we’d be on the hook for a 20% capital gain tax. Until, at least, this new market sell off.
Suddenly that capital gain was disappearing. Indeed, with an ~8% drop today, it would be completely gone. So with the market down ~6.34%, figuring that would be close enough, I put in the sell order and moved from VTSAX to our Money Market fund. Conveniently, by the market’s close, it was down 7.6%. Almost exactly what I needed. Good luck, that.
So with this sale, I now have the capital freely available and will owe little or no capital gains tax.
At the same time, I then sold an equivalent amount of VBTLX (bonds) and bought VTSAX (stocks) in an IRA. Because this was done in the IRA, there is no tax consequence.
The net effect is that I have moved bonds from the IRA and stocks into it, again while freeing up money for the future purchase with no capital gains tax to be paid.
At the end of the day, our asset allocation remains the same. This is not a bet that the market has bottomed.
Wouldn’t you have been better off if the market had continued to rise, even if you had to pay the capital gains tax?
Of course, but as I learned playing poker, you play the cards you are dealt not the ones you wish you had. If I had a crystal ball, I would have sold before the drop and happily paid the tax. But I don’t.
This market decline simply offered an opportunity and I took it. I’d prefer the market never went down and I always could sell at a gain. The market doesn’t care about my preferences.
Why not wait to see if the market drops further? That way you not only avoid the capital gain but get to harvest a capital loss.
I want to preserve as much capital as possible for the future purchase. Selling at break even is the sweet spot for this gambit.
Doesn’t this run afoul of the IRS ‘wash sale’ rules? (my thanks to the several reader who raised this question and especially to JohnR who suggested I add it here. This is my reply to James, the first who raised the question:
Wash sales apply to selling at a loss. To quote from the article you linked to:
“Loss from wash sales of stock or securities. This ruling provides that if an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to purchase substantially identical stock or securities within a specified period, the loss on the sale of the stock or securities is disallowed under section 1091 of the Code, and the individual’s basis in the IRA or Roth IRA is not increased by virtue of section 1091(d).”
In my case, the objective was to sell at break even with neither a loss or a gain. Because life isn’t perfect, there will likely be a small gain or loss when the dust settles. But it will be too small to worry about. (see my conversation with James in the comments below for more)
Why did you move into a money market fund rather than bonds with VBTLX?
Mostly because it was easier and I wanted to get the order in before the market closed. I might move it to bonds later.
Wait, but aren’t bonds best held in an IRA?
Ordinarily, yes. But remember, this was done to free up capital from stocks for potential future spending. Money you intend to spend in the next five years or so is best held in cash, which is what a money market fund is, or bonds.
Planning any further moves?
As noted in the Addendum to my last post, when the market was down ~15% on Feb 28th, I moved some VBTLX to VTSAX. If the market continues to drop, I’ll do more of that. Taking advantage of drops like this are what bonds are for. 🙂
Isn’t this scary?
No. This is scary:
But this time is different, right!!??
Every market drop feels like “This time is different.”
Someday, if it truly is, nothing will matter least of all how you are invested.
1963. Brink of nuclear war between the USSR & the USA, a truly civilization ending possibility.
Great time to buy. No war, market goes back up. War, market doesn’t matter.
…are like chainsaws. Incredibly useful. Incredibly dangerous. Resolve to pay in full each month and never carry a balance. Do that and they can be great tools. Here are some of the very best for travel hacking, cash back and small business rewards. That link will give you my full take.