I could use some Wash Rules help, please

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills

I could use some Wash Rules help, please

Postby SlowEddie » Sat Dec 29, 2012 6:37 pm

In late December I sold a Vanguard non-tax-sheltered mutual fund and realized a long-term capital gain to avoid taking a future gain at a potentially higher rate. A few days later I bought back the same fund (more shares than I sold). However, duh, I forgot to check Vanguard's dividend schedule and I ended up buying myself another LT (and a smaller ST) gain, as well as a an unrealized ST capital loss that would, if realized, offset the capital gain I just bought. If I understand the wash rules, I could sell the shares I just bought and the rules wouldn't apply because the shares I sold are not replacement shares as per the IRS definition, but rather are identical shares.

I hope this is correct so far. Now here are my concerns: Because the dividends and gains were added back to my holdings, I own more shares than I bought a couple of days earlier. Does that in some way mess up the "identical shares" rule? Second, when I bought the fund, I also added the same fund to a position in an IRA. I know capital losses can be "lost" via the wash rule if one buys a an identical fund in an IRA, but since my proposed sale does not constitute a replacement, I assume I have no exposure to the IRA rule. Yes? No?

I hope this makes sense. My inclination is to take my lumps and use the unrealized loss at a later date. After all, it's my own stupid mistake that got me into this. But I would like to know the tax consequences. If I am to sell, I have to do it Monday. Thanks.
Ed

PS If I want to buy back the fund again within 60 days, I'll have to ask Vanguard's permission in writing to avoid their churning rules. Life becomes difficult when you do stupid things!
SlowEddie
 
Posts: 42
Joined: Thu Dec 06, 2007 5:52 pm

Re: I could use some Wash Rules help, please

Postby archbish99 » Sat Dec 29, 2012 6:57 pm

I don't see an obvious wash sale in what you've described. You said that in late December (last year, or this?), you sold shares in a taxable account and realized a capital gain. Because it was a gain rather than a loss, wash sales don't apply to begin with -- they're only applicable to realized losses. You then purchased a new lot, which is independent of the previous shares. You also received a capital gain distribution, which will appear on your taxes along with the realized gain from the previous sale. You then purchased additional shares with this distribution. (The fact that Vanguard did this for you is a convenience not reflected in the tax law.)

Is the unrealized loss because the value of these shares has declined since your purchases? If so, wash sale rules would apply if you sold them to realize the loss, then repurchased the shares within 30 days. If you're instead referring to an unrealized loss within the fund, that doesn't impact you at all -- it just means that in the future the fund can realize capital gains without being forced to make a distribution.

The IRA shares don't come into the picture, not because they're in an IRA, but because you didn't sell for a loss.
I'm not a financial advisor, I just play one on the Internet.
User avatar
archbish99
 
Posts: 1280
Joined: Fri Jun 10, 2011 7:02 pm

Re: I could use some Wash Rules help, please

Postby SlowEddie » Sat Dec 29, 2012 8:59 pm

Archbish99, thanks for your reply. Let me respond: My original sale was this December and I understand because it was a gain rather than a loss, wash sales don't apply to this transaction. (I just mentioned this to explain why I bought the fund back a few days later). I also understand I received a capital gain distribution, which will appear on my taxes along with the realized gain from the previous sale. I then purchased additional shares with this distribution.

It is my understanding that the unrealized loss is directly attributable to the value of the distributed gains, i.e., these specific shares did decline since my purchase by the amount of the distribution/share. But your point is well taken: "wash sale rules would apply if you sold them to realize the loss, then repurchased the shares within 30 days...the IRA shares don't come into the picture, not because they're in an IRA, but because you didn't sell for a loss."

So the bottom line is exactly as you state. Said another way, as long as I don't repurchase within 30 days I have no exposure to wash sale rules!!! Got it. Sorry about my confusion -- I was missing the forest for the trees. Thank you. Ed
SlowEddie
 
Posts: 42
Joined: Thu Dec 06, 2007 5:52 pm

Re: I could use some Wash Rules help, please

Postby archbish99 » Sat Dec 29, 2012 11:16 pm

Actually, if all the original transactions were also this month, you do have a possible exposure -- you're buying in the IRA, then (you're considering) selling for a loss. That would be a wash sale, if less than 30 days have passed between the two.
I'm not a financial advisor, I just play one on the Internet.
User avatar
archbish99
 
Posts: 1280
Joined: Fri Jun 10, 2011 7:02 pm


Return to Personal Finance (Not Investing)

Who is online

Users browsing this forum: Google [Bot] and 20 guests