Tax loss harvesting is useless

Two problems basically

  • Not Scalable, on an average you’ll be down 10-20%
  • Stocks are sold in FIFO order, so in long term there would be no loss

Community thoughts please?

What do you mean by this? Could you explain with an example?

I don’t get this either. Why do you say there would be no loss? Again, an example or two would help others understand what you mean.

Let’s say you have a STCG of 5L in US stocks. It’s not feasible to have 5L of loss in domestic equity portfolio. Most probably the drawdown would be in range of 15-20%. To have 5L you need to have portfolio of ~25L.

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Lets say you invest in NIFTY index fund and nothing else. And you’ve investing for ~5 years. Current portfolio size is 10L @ average price of 13000.

Let’s say I invested 1L @16000 levels in Jan. Currently NIFTY is at 15000. Now you have loss of 1000 points on the units purchased in Jan. But you can’t book the losses because of FIFO i.e. oldest units will get redeemed and that will have lower buy price therefore you’ll end up paying taxes on gains.

I hope you get the problem now.

@Shashikant_Sharma there are some scenarios where it works…

  1. 1L LTCG on equity is tax free… You can use that every year.
  2. If you see that some of your holdings are in negative, you can realize the losses so that you can set off other gains in the same year or next 8 yrs…

Your examples make the two points much clearer, thank you.

Sure, you may not have enough loss to cover the entire gains. But why does it have to be all or nothing? If you have 1L loss in domestic equity, then that is still taxes on 1L saved, isn’t it? How does this make tax loss harvesting “useless”?

This is one reason why it pays to do tax gain harvesting every year, now that LTCG above 1L is taxable. If you do this every year using new MF folios (which is a facility that is provided free of cost by fund houses), then you will have “recently bought” units to redeem when required.

The brief idea is: near the end of the FY, redeem enough MF units so that the net LTCG over the entire year (after setting off any capital losses in the FY) is slightly below 1L. Then, buy the same MF’s units in a new folio with the proceeds of the sale. There may be some slippage of price in between the sale and the purchase, but that is OK.

Yes, this requires some time and effort to manage (takes me around 1 hour every year). And yes, this won’t work as is for shares because there is no concept of “folios” there; you need two demat accounts to pull this off with shares.


@ZeroIndian Thanks,
This makes sense. Whatever we can harvest should harvest. A penny saved is a penny earned :smiley:

I didn’t think of this idea man. I can definitely do this even for stocks with multiple brokers. For e.g. I can sell on Upstox and buy on Zerodha at the same time. Also, buying back again updates your cost averages as well. So in case market corrects, you can still save some money again.

Once again, Thanks for taking your time to elaborate @ZeroIndian.

Yes, this is one way to do it.

In my (limited, since tax on LTCG is a recent thing) experience, one can always buy back at a lower cost by waiting for a week or two, because share prices go up and down randomly over any short period, usually.