As a DIY investor, it can be tempting to try to save money by DIY-ing certain tasks, such as tax loss harvesting. After all, many online brokers like Fidelity offer the tools to do so and there is a wealth of information available on the internet about how to go about it. However, while it is possible to implement tax loss harvesting on platforms like Fidelity, there are several reasons why using a specialized tool like Betterment may be a better option for most investors. In this blog post, we’ll delve into a purported case DIY tax loss harvesting gone wrong using Fidelity’s platform.

Before we begin, it’s important to note that the information in this post is based on a report by a user on Reddit and has not been independently verified. That being said, it is not my intention to criticize Fidelity or any other company. The purpose of this post is to highlight the fact that when you use tools that were not specifically designed for tasks like tax loss harvesting, there is a higher risk of mistakes occurring.

On Thursday, December 29, 2022, user u/1800ratraid posted the following on r/fidelityinvestments:

Issues/Warning Regarding Tax Loss Harvesting on Fidelity Website

Good morning Fidelity investing community,

I advise being very careful when placing any specific lot trades with Fidelity – track the lots, screenshot/video your trades, and keep an accounting of your total shares during the sale process.

I’ve just gotten off the phone escalating a trade dispute with Fidelity and want to warn other folks so they don’t have the same issue I am experiencing.

Fidelity’s tax lot trading system is not working properly. The last 2 days I have been selling VTI and VXUS and only selecting lots that showed unrealized losses, in an attempt to 0 out my gains from earlier this year and reduce my income by $3K.

I have been investing daily-weekly for over a decade and thus hundreds of lots. I am not new to the Fidelity system and in fact worked there for some time and very well versed in their online trading system.

I started with $15K in gains I needed to negate and started selling lots sorted by greatest loss in VXUS and VTI and making corresponding occasional buys into ITOT and IXUS. I sold several pages/scrolls of the largest negative lots of both. To clarify, I was sorting the lots by amount of gains and losses. This puts the largest negative loss at the bottom of the list of lots. I would select the greatest loss first and working up for a few scrolls of the window, never getting into the unrealized positive gains, and placing the trades after 2-3 pages of lots were selected.

The preview order page showed estimated losses on every trade I placed. I finished selling these lots over the past 2 days. Today I log in today and see extremely low balances of shares in VTI and VXUS.

I call Fidelity and they review the orders and say lots were being sold for gains. The trader I spoke with told me that many orders placed had unrealized gains (not losses), and that I had a net gain through all of my trades of several thousand dollars. The trader I spoke with talked to their IT team and supervisor and have told me there is nothing they can do as the trades on their end do not reflect what I was selecting in the trade ticket for share selection.

Edit: Not a wash sale issue – I am aware of the rules. Another redditor said it seems like it may be a problem of the specific lot selection screen not updating so it allowed me to sell lots multiple times, causing it to grab different shares that weren’t what I selected. This would make sense as it would sometimes update with new lots with losses larger than what I had already sold. I thought this was happening because I was told (Fidelity) I had too many lots for the screen to display them all so assumed it was normal to pull in different amounts. I wanted to harvest as much loss as possible and continued selling until the amounts shown were not high enough to warrant the time.

Source: https://www.reddit.com/r/fidelityinvestments/comments/zyas6i/issueswarning_regarding_tax_loss_harvesting_on/

To summarize this post briefly, the user claims:

• Fidelity’s tax lot trading system is not working properly
• The writer experienced issues when selling shares with unrealized losses
• The system sold lots with unrealized gains instead of the selected lots with losses
• The writer contacted Fidelity, who were unable to resolve the issue
• The problem may be with the specific lot selection screen not updating properly, causing the system to grab different shares that were not what the writer selected
• The writer advises others to be careful when placing specific lot trades with Fidelity and to track and keep records of their trades

To their credit, Fidelity did reply to the post and asked to follow up with the user. It is unclear what, if any, resolution they were able to reach.

Another user, u/Apt_ferret, provided the following suggestions for implementing tax loss harvesting at Fidelity going forward:

Suggestions for going forward:

1. Go to https://oltx.fidelity.com/ftgw/fbc/ofaccounts/convertCostBasisMethods and select High-Cost for your taxable accounts.
2. You can reassign lots up to the settlement date (T+2 for ETFs and stocks).
3. If you anticipate taking losses, stop dividend reinvestment for those shares to avoid accidental wash sales.
4. https://oltx.fidelity.com/ftgw/fbc/ofaccounts/closedPositions?ALL_ACCTS=Y shows closed postitions.

I understand this is not going to help your older trades.

Source: https://www.reddit.com/r/fidelityinvestments/comments/zyas6i/comment/j24typs/?utm_source=share&utm_medium=web2x&context=3

I can’t speak to the specifics of what happened in this case or whether the suggestions provided would have helped (other than to note that the user is correct that things like dividend reinvestment can trigger accidental wash sales), but let’s contrast this with how easy tax loss harvesting is on a platform like Betterment:

Step 1: Turn on Tax Loss Harvesting

Step 2: That’s it. All you had to do was Step 1.

With Betterment, you get automated tax-loss harvesting that is incredibly easy to implement. This is one of many reasons why I feel that Betterment’s fee is easily worth it.

To provide some background for those who may be unaware, tax loss harvesting is a technique used to increase one’s after-tax wealth by selling assets that have experienced a loss and buying a similar asset to replace it. This allows the investor to “harvest” a valuable loss and keep their portfolio allocated in a reasonable manner. Harvested losses can offset capital gains, provide tax deferral, push capital gains into a lower tax rate, and offset up to $3,000 of ordinary income at one’s top marginal rate.

At Betterment, specifically, Betterment’s Tax Loss Harvesting+ (TLH+) feature is a fully automated service that scans portfolios regularly for opportunities to realize losses which can be valuable at tax time. TLH+ takes a holistic approach to tax efficiency and seeks to optimize every user-initiated transaction in addition to adding value through automated activity such as rebalances.

Some of the specific features of TLH+ include avoiding exposure to short-term capital gains in an attempt to harvest losses, avoiding negative tax arbitrage traps, having zero cash drag at all times, having dynamic trigger thresholds for each asset class, and protecting user-realized losses from the wash sale rule. TLH+ also rebalances across all asset classes, rather than just within the same asset class, to reduce the need for rebalancing during volatile stretches and decrease realized gains. TLH+ is accessible to Betterment investors at no additional cost and is fully automated and effective.

Even if it is the case that the Reddit post mentioned above was more so a user error than a Fidelity error, the case still highlights to risks of trying to DIY complex strategies like tax-loss harvesting. While it is easy for humans to make simple mistakes when there are so many different computations and rules that need to be followed in a tax loss harvesting scenario, the reality is that properly designed computer programs can thrive at these tasks. They won’t get fatigued or forget about a rule.

Therefore, a major reason to consider using Betterment’s Tax Loss Harvesting+ (TLH+) service instead of trying to DIY tax loss harvesting on a platform like Fidelity is the level of automation and expertise offered by TLH+. As mentioned above, TLH+ uses a number of innovations to optimize tax efficiency and seek out opportunities to realize losses in a portfolio. This level of automation and expertise can be difficult for individual investors to replicate on their own, especially if they are not well-versed in the complexities of tax loss harvesting. By using TLH+, investors can trust that their portfolio is being managed by professionals with a deep understanding of the tax loss harvesting process.

In addition, TLH+ takes a holistic approach to tax efficiency, seeking to optimize every user-initiated transaction in addition to adding value through automated activity such as rebalances. This means that you can trust that your portfolio is always being managed with tax efficiency in mind, without having to manually monitor it yourself. This can save you time and effort, which can allow you to focus on earning and saving more, in addition to providing a more tax-efficient portfolio overall.

Overall, using Betterment’s TLH+ service may be a better option for most investors than trying to DIY tax loss harvesting on a platform like Fidelity. The level of automation and expertise offered by TLH+ can make the process more efficient and effective, while also saving you time and effort.