Tax-loss harvesting and partial wash sale

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anemone
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Tax-loss harvesting and partial wash sale

Post by anemone » Thu Jul 03, 2008 11:40 am

I'm sitting on a substantial unrealized loss in VTSMX (total stock market) I'd like to tax-loss harvest. However my account is set to automatically reinvest dividends, so I've purchased a few shares recently. It's my understanding that to avoid the wash sale rule, I would need to:

1. wait at least 30 days after purchasing VTSMX
2. sell VTSMX, switching into a not "substantially identical" security
3. wait at least 30 days
4. sell the replacement shares and switch back into VTSMX

But what happens if I don't wait the initial 30 days before selling VTSMX? Would the loss on the entire sale be disallowed as a wash, or would only the loss on the recently-purchased dividend shares be disallowed?

Of course it's easy enough to wait the 30 days, but I was considering locking in the loss sooner rather than later while much of it is still short-term.

Seems like interference with tax-loss harvesting is one reason not to automatically reinvest dividends...

Wagnerjb
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Post by Wagnerjb » Thu Jul 03, 2008 12:20 pm

You won't have a problem if you sell all the shares of VTSMX. You only have to wait 30 days before selling if you are not selling the entire amount you own.
Seems like interference with tax-loss harvesting is one reason not to automatically reinvest dividends...
Yes, you are right.


Best wishes.
Andy

Startled Cat
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Post by Startled Cat » Thu Jul 03, 2008 1:19 pm

I'm in exactly the same situation, except I sold the shares before I realized that a dividend had been reinvested. I just did some reading over the past few minutes and it sounds like this has no net effect on the loss you can deduct as long as you sell all of the shares. Fairmark addresses this, as does a similar forum post there.

By the way, I had intended to tax loss harvest into other funds, but the market closed early today just as I had finished selling my original ETFs. Now I'm going into the long weekend with much less equity exposure than my plan calls for. I think it's funny that people tend to lose sleep over their equity investments in volatile markets, but I get nervous when I'm below 100% equity.

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sewall
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Post by sewall » Thu Jul 03, 2008 2:09 pm

This is interesting and I've been thinking about it as well. In my case I have TSM in my tax-advantaged portfolio AND in my taxable one. I am going to leave the TSM in my tax-advantaged account alone and I will TLH the taxable one and buy SP500 or large cap. But I have reinvested dividends occurring in my tax-advantaged TSM so that creates a wee bit of a partial wash sale.

To avoid all wash sale issues I'm thinking I would have to turn off the dividend reinvestment in my tax-advantaged TSM, wait 31 days since the last reinvestment, then TLH the taxable TSM, and then of course wait 31 days before buying any TSM again (or substantially identical).

Sound right?

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PiperWarrior
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Post by PiperWarrior » Thu Jul 03, 2008 2:30 pm

sewall wrote:This is interesting and I've been thinking about it as well. In my case I have TSM in my tax-advantaged portfolio AND in my taxable one. I am going to leave the TSM in my tax-advantaged account alone and I will TLH the taxable one and buy SP500 or large cap. But I have reinvested dividends occurring in my tax-advantaged TSM so that creates a wee bit of a partial wash sale.

To avoid all wash sale issues I'm thinking I would have to turn off the dividend reinvestment in my tax-advantaged TSM, wait 31 days since the last reinvestment, then TLH the taxable TSM, and then of course wait 31 days before buying any TSM again (or substantially identical).

Sound right?
Yes. Several months ago, IRS clarified that a purchase of substantially identical securities in an IRA could be considered a purchase of replacement shares.

If you do TLH at least 31 days after the reinvestment in your tax-advantaged account and at least 31 days before the next reinvestment (September, 2008), you do not have to turn off reinvestment of dividends in your tax-advantaged account.

anemone
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Post by anemone » Thu Jul 03, 2008 2:58 pm

aaronl wrote:I'm in exactly the same situation, except I sold the shares before I realized that a dividend had been reinvested. I just did some reading over the past few minutes and it sounds like this has no net effect on the loss you can deduct as long as you sell all of the shares. Fairmark addresses this, as does a similar forum post there.
Thanks...I've read the Fairmark article, I can see how the "Selling All" example applies if I sell the entire position permanently. But the article says of the examples that "there are no purchases or sales of stock other than those described". So it seems to me that all they're saying in this example is that it's not a wash if a position is completely liquidated, even if a portion of the position has been owned for less than 30 days. However, the impact of a later repurchase (replacement shares) is not discussed. Wouldn't then my later transfer back into VTSMX then essentially recharacterize the dividend share purchase as a wash?:

1. late June: dividend reinvested into VTSMX
2. early July: sell all VTSMX
3. after 30+ days, repurchase VTSMX

Steps 1 and 2 (the only transactions discussed in the Fairmark example) don't trigger a wash sale, but step 3 does because the shares in step 1 were purchased within +/- 30 days of step 2. Because the dividend shares didn't "stay sold" within the required time window any loss on them is disallowed. Is that right?

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LH2004
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Post by LH2004 » Thu Jul 03, 2008 3:09 pm

No.

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PiperWarrior
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Post by PiperWarrior » Thu Jul 03, 2008 3:13 pm

The Wash Sale Rule defines a wash sale like so:
The wash sale rule prevents you from claiming a loss on a sale of stock if you buy replacement stock within the 30 days before or after the sale.
So, the question is whether you are buying replacement stock within the time window. The reinvested dividends do not count as replacement stock if you sell everything. Your Step 3 is not within 30 day window, so that doesn't make Step 2 a wash sale.

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grabiner
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Re: Tax-loss harvesting and partial wash sale

Post by grabiner » Thu Jul 03, 2008 8:28 pm

anemone wrote:I'm sitting on a substantial unrealized loss in VTSMX (total stock market) I'd like to tax-loss harvest. However my account is set to automatically reinvest dividends, so I've purchased a few shares recently. It's my understanding that to avoid the wash sale rule, I would need to:

1. wait at least 30 days after purchasing VTSMX
2. sell VTSMX, switching into a not "substantially identical" security
3. wait at least 30 days
4. sell the replacement shares and switch back into VTSMX

But what happens if I don't wait the initial 30 days before selling VTSMX? Would the loss on the entire sale be disallowed as a wash, or would only the loss on the recently-purchased dividend shares be disallowed?
If you sell the recently-purchased shares (at a loss or gain), then you can't have a wash because there aren't any replacement shares. In order to do this, you need to either sell your entire holding or use specific identification (telling Vanguard to sell the shares purchased on June 26).

If you don't sell the recently-purchased shares, then you do have a wash. For example, if you bought 100 shares in January and 10 shares in June, and you sold the January shares in July, you would have a wash sale for 10 shares, so you could only deduct 9/10 of the loss, with the remainder adjusting your basis in the June shares.

David


Of course it's easy enough to wait the 30 days, but I was considering locking in the loss sooner rather than later while much of it is still short-term.

Seems like interference with tax-loss harvesting is one reason not to automatically reinvest dividends...[/quote]
Wiki David Grabiner

MPL
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Post by MPL » Thu Apr 30, 2009 11:12 pm

Hi, sorry to bring up a dead thread. I have a very similar question though. In fidelity, your fractional shares have a later sale date listed than the rest of your shares, even if you put in a sell all order. Does the fact that the shares are listed as sold on a different date mean that selling all shares constitutes a wash sale for the amount of the fractional shares, even though only one order was place?

notsure
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Re: Tax-loss harvesting and partial wash sale

Post by notsure » Sun Aug 23, 2015 11:29 am

I found this old thread to be useful and thought that those who have been posing TLH questions recently might feel the same way.

I wondered, though, what happens if my spouse has just purchased shares in VXUS when I intend to tax loss harvest losses on my own shares in VXUS?

If I were to sell all of my shares in VXUS within 30 days of my spouse's purchase, would that prevent a wash sale?

Or would both my spouse and I need to sell all of our shares in VXUS to prevent a wash sale? (I realize I could wait until 31 days after her purchase otherwise.)

livesoft
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Re: Tax-loss harvesting and partial wash sale

Post by livesoft » Sun Aug 23, 2015 11:39 am

notsure wrote:I found this old thread to be useful and thought that those who have been posing TLH questions recently might feel the same way.

I wondered, though, what happens if my spouse has just purchased shares in VXUS when I intend to tax loss harvest losses on my own shares in VXUS?

If I were to sell all of my shares in VXUS within 30 days of my spouse's purchase, would that prevent a wash sale?

Or would both my spouse and I need to sell all of our shares in VXUS to prevent a wash sale? (I realize I could wait until 31 days after her purchase otherwise.)
Your spouse's purchase of VXUS affect the wash sale status of any shares of VXUS/VTIAX/VGTSX that you would sell at a loss. It doesn't matter if you sell all your shares or not. Any loss would get added to the basis of your spouse's newly purchased shares if those shares were still owned when you sold your shares. Now if those shares were sold FIRST, then there would be no replacement shares to add your loss to, so you would be good to book the loss. OTOH, the order of selling would not matter since by changing the basis if the spouse's shares were sold after you sold your shares, the loss still gets accounted for. This all assumes that none of the shares are in tax-advantaged accounts.

It is also helpful to think through what "added to the basis" means. It means that when the replacement shares are eventually sold that they will have a lower realized gain or higher loss than if nothing was added to the basis. That is, one benefits from the original loss anyways.

Also I did not go into any detail about a partial wash sale in this response.

And then this leads to the question: If one bought in an IRA a few days before one wants to tax-loss-harvest in a taxable account, can one simply sell that position in the IRA before one sells in taxable and avoid a wash sale? :twisted:
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notsure
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Re: Tax-loss harvesting and partial wash sale

Post by notsure » Sun Aug 23, 2015 12:31 pm

Thank you very much livesoft.
Now if those shares were sold FIRST, then there would be no replacement shares to add your loss to, so you would be good to book the loss.
To make sure I understand correctly, there would be no wash sale were I to liquidate all my shares in VXUS after my spouse had sold the specific lot of shares/position she just purchased? My wife would therefore not need to sell all her shares in VXUS. She would just need to sell the recent lot of shares. In both instances, our shares are held in taxable accounts.
Also I did not go into any detail about a partial wash sale in this response.
I had considered simply selling my far larger number of shares than the number recently purchased by my wife, causing a partial wash sale, but the accounting is confusing to me. I do prefer the simplicity of there being no wash sale at all!

livesoft
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Re: Tax-loss harvesting and partial wash sale

Post by livesoft » Sun Aug 23, 2015 12:34 pm

notsure wrote:To make sure I understand correctly, there would be no wash sale were I to liquidate all my shares in VXUS after my spouse had sold the specific lot of shares/position she just purchased? My wife would therefore not need to sell all her shares in VXUS. She would just need to sell the recent lot of shares. In both instances, our shares are held in taxable accounts.
That is what I am suggesting, but I make no guarantees that my suggestion is legitimate. What do others think?

OTOH, your spouse should want to TLH those recently purchased shares anyways. :)
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notsure
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Re: Tax-loss harvesting and partial wash sale

Post by notsure » Mon Aug 24, 2015 9:17 am

Thanks again.

It does somehow seem surprising to me that a recently purchased lot of shares/position can be sold to prevent a subsequent wash sale within 30 days. I wonder if others have experience with doing this?

DKelly
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Re: Tax-loss harvesting and partial wash sale

Post by DKelly » Mon Aug 24, 2015 9:46 am

I am using SpecID cost basis accounting for Total International. I would like to do about a $5,000 TLH and exchange into FTSE All-World Ex-US. My last purchase of Total International was August 20. My largest losses are for lots purchased several months ago. Can I sell the entire position, or does the Aug 20 purchase have to remain since it was within the last 30 days? Thank you.

livesoft
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Re: Tax-loss harvesting and partial wash sale

Post by livesoft » Mon Aug 24, 2015 10:11 am

You do not need to sell all of your shares. You do need to sell the shares purchased August 20th or you will have a [partial] wash sale. Since you are using SpecID, you can sell only the shares that have a loss and that must include the shares purchased last week. However, you can also sell all your shares if you want to.
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DKelly
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Re: Tax-loss harvesting and partial wash sale

Post by DKelly » Mon Aug 24, 2015 10:38 am

livesoft wrote:You do not need to sell all of your shares. You do need to sell the shares purchased August 20th or you will have a [partial] wash sale. Since you are using SpecID, you can sell only the shares that have a loss and that must include the shares purchased last week. However, you can also sell all your shares if you want to.
Thank you for the clarification. Much appreciated.

notsure
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Re: Tax-loss harvesting and partial wash sale

Post by notsure » Tue Aug 25, 2015 9:27 am

You do need to sell the shares purchased August 20th or you will have a [partial] wash sale.
How problematic is a partial wash sale? From what I've read, it seems like it could risk the entire loss being deemed a wash sale.

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House Blend
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Re: Tax-loss harvesting and partial wash sale

Post by House Blend » Tue Aug 25, 2015 10:03 am

notsure wrote:
You do need to sell the shares purchased August 20th or you will have a [partial] wash sale.
How problematic is a partial wash sale? From what I've read, it seems like it could risk the entire loss being deemed a wash sale.
Maybe you need to find better reading materials. ;-)

If it's a partial wash sale, then by definition, the entire loss is not involved.

This post may be helpful:
viewtopic.php?p=2600502#p2600502

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