"Wash Sale" Questions

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AgentHoopla
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"Wash Sale" Questions

Postby AgentHoopla » Fri May 19, 2017 6:43 am

Questions are in scenario 2 and 3

The IRS defines a "wash sale" is as follows:

The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so.

Hypothetical Assets: (Both held in taxable accounts)
VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) = $100,000
SWTSX (Schwab Total Stock Market Index Fund®)= $50,000

Scenario 1:
Its 2017, something major happens and both of your funds (Schwab and Vanguard) are down 50% from their starting value
VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) = $100,000 DOWN to $50,000
SWTSX (Schwab Total Stock Market Index Fund®)= $50,000 DOWN to $25,000

You sell both funds and rebuy them a day later.
BEEEEEEEEEEEEEEEEEEEEEP. Thats a wash sale. No deductions for you.


Scenario 2:
Its 2017, something major happens and both of your funds (Schwab and Vanguard) are down 50% from their starting value
VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) = $100,000 DOWN to $50,000
SWTSX (Schwab Total Stock Market Index Fund®)= $50,000 DOWN to $25,000

You sell SWTSX for $25,000 (getting a $25,000 loss write off) and buy VTSAX the following day. Is this considered a wash sale? or do you get to keep the $25,000 write off?

Scenario 3:
Its 2017, something major happens and both of your funds (Schwab and Vanguard) are down 50% from their starting value
VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) = $100,000 DOWN to $50,000
SWTSX (Schwab Total Stock Market Index Fund®)= $50,000 DOWN to $25,000

You sell VTSAX and SWTSX (getting a $75,000 write off) than purchase VTSAX for $25,000 (using SWTSX money) and purchase SWTSX (using VTSAX) money the following day, is this considered a wash sale? or do you get to keep the $75,000 write off, since you bought "different" funds with [arguably] "different" money

VTSAX and SWTSX are close, but not identical and they are both offered from different vendors, are VTSAX and SWTSX substantially different enough?

Clarification is greatly appreciated. :D
Last edited by AgentHoopla on Fri May 19, 2017 6:48 am, edited 1 time in total.

student
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Re: "Wash Sale" Questions

Postby student » Fri May 19, 2017 6:46 am

You may want to look at viewtopic.php?t=204903 (the last reply).

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DaftInvestor
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Re: "Wash Sale" Questions

Postby DaftInvestor » Fri May 19, 2017 6:48 am

Since they both attempt to track the total US Stock Market (although use different indexes to do so) I would call them substantially identical and wouldn't test the IRS on this one. Others may disagree.
I'd look at something that tracks the S&P500 as not substantially identical (but tends to follow the same pattern so is a good TLH partner).

rkhusky
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Re: "Wash Sale" Questions

Postby rkhusky » Fri May 19, 2017 7:06 am

No one knows what "substantially identical" means. Is it more identical than identical or less identical than identical or the same as identical?

AgentHoopla
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Re: "Wash Sale" Questions

Postby AgentHoopla » Fri May 19, 2017 7:11 am

rkhusky wrote:No one knows what "substantially identical" means. Is it more identical than identical or less identical than identical or the same as identical?


That is what is confusing me, I am trying to skirt around the substantially idential thing by picking Schwab versus Vanguard funds, there are some differences if you can be nitpicky enough, but I am not sure what other Bogleheads thought about the situation.

livesoft
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Re: "Wash Sale" Questions

Postby livesoft » Fri May 19, 2017 7:13 am

Since it is so easy to buy something obviously not substantially identical, there is no reason to even ask if VTSAX and SWTSX are substantially identical in order to try to figure out if they are substantially identical. One should just consider them so.

Do not forget:

A. Wash sales are not illegal.

B. You get to keep the write-off, but just cannot use it right away. Read the rest of the IRS rules.

Answers to your questions:

1. Wash sale.
2. Wash sale.
3. Wash sale.

Now let's talk reality:

You would have tax-loss harvested these funds WELL BEFORE they were off by 50%. Say VTSAX was exchanged for VLCAX. No wash sale. You wouldn't even consider exchanging VTSAX into SWTSX because they are probably held at different financial institutions anyways. Then VLCAX would continue to drop. At some point, you would TLH VLCAX back into VTSAX. I cannot predict which one you would end up with in the end, but there would be a good chance that you ended up with VTSAX.

Got any other wild ideas?
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AgentHoopla
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Re: "Wash Sale" Questions

Postby AgentHoopla » Fri May 19, 2017 7:24 am

livesoft wrote:
Got any other wild ideas?


Yeah, I do.

Since you said that a normal person would have TLH well before the 50% drop, when do you recommend TLHing? in small increments such as the small 1.8% drop we just recently had? or only when a big market correction occurs?

livesoft
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Re: "Wash Sale" Questions

Postby livesoft » Fri May 19, 2017 7:32 am

I recommend TLHing at the low point of the market (or investment) for the year. There should be no commissions and no costs to TLH, so you can do it as often as you want.

The other day would have been unusual to TLH because that would've meant you probably bought shares in the previous 2 weeks, but yes, if you had losses, it was a good day to TLH. I like to TLH on days that are so-called RBDs (look it up).
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House Blend
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Re: "Wash Sale" Questions

Postby House Blend » Fri May 19, 2017 10:09 am

Scenario 3: definitely a wash. There is no concept of "different money".

Scenario 2: that's up to you and your tax preparer to decide. However, I think no one other than Michael Kitces would argue that VTSAX and SWTSX are substantially identical.

AgentHoopla wrote:Hypothetical Assets: (Both held in taxable accounts)
VTSAX (Vanguard Total Stock Market Index Fund Admiral Shares) = $100,000
SWTSX (Schwab Total Stock Market Index Fund®)= $50,000

Side Comment: the value of your holdings at any moment in time is irrelevant. What matters is how much you paid for those shares versus how much you receive for them when you sell.

In other words, if your shares of VTSAX stocks drop 50% to $50,000, you aren't going to be harvesting a loss of $50,000 unless you paid $100,000 for those shares.

goingup
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Re: "Wash Sale" Questions

Postby goingup » Fri May 19, 2017 10:18 am

AgentHoopla wrote:Since you said that a normal person would have TLH well before the 50% drop, when do you recommend TLHing? in small increments such as the small 1.8% drop we just recently had? or only when a big market correction occurs?


How big was your loss (on a cost basis) after the 1.8% drop? I glanced at our VTSAX holdings and even though YTD purchases were 30K there was less than $100 to harvest. Are you actually looking at the cost basis of your shares?

aristotelian
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Re: "Wash Sale" Questions

Postby aristotelian » Fri May 19, 2017 10:40 am

I would not risk it. I would either:

a) Buy VFINX (S&P 500 Index) which is substantially different; or
b) Wait 30 days

With the market dropping 50%, I would probably be more inclined to wait the 30 days.

livesoft
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Re: "Wash Sale" Questions

Postby livesoft » Fri May 19, 2017 11:06 am

aristotelian wrote:With the market dropping 50%, I would probably be more inclined to wait the 30 days.

I would be vehemently opposed to that. Do you know how much "the market" went up in the 30 days after the March 2009 lows? My experience is that big market drops are often an overshoot that is followed by an big upswing ... maybe not to where were it at previous high, but the quicker they fall, the quicker they rise (and probably vice versa).

But please check out that 30 days back in March 2009.
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aristotelian
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Re: "Wash Sale" Questions

Postby aristotelian » Fri May 19, 2017 11:38 am

livesoft wrote:
aristotelian wrote:With the market dropping 50%, I would probably be more inclined to wait the 30 days.

I would be vehemently opposed to that. Do you know how much "the market" went up in the 30 days after the March 2009 lows? My experience is that big market drops are often an overshoot that is followed by an big upswing ... maybe not to where were it at previous high, but the quicker they fall, the quicker they rise (and probably vice versa).

But please check out that 30 days back in March 2009.


I was not advocating the 30 days, just stating realistically what my behavior would likely be.

Da5id
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Re: "Wash Sale" Questions

Postby Da5id » Fri May 19, 2017 11:55 am

livesoft wrote:
aristotelian wrote:With the market dropping 50%, I would probably be more inclined to wait the 30 days.

I would be vehemently opposed to that. Do you know how much "the market" went up in the 30 days after the March 2009 lows? My experience is that big market drops are often an overshoot that is followed by an big upswing ... maybe not to where were it at previous high, but the quicker they fall, the quicker they rise (and probably vice versa).

But please check out that 30 days back in March 2009.


If doing a TLH on a bond fund if there was no reasonable partner, sitting out 30 days is fine. Makes little sense on a stock fund. S&P 500 and Total Market correlate so well. After 30 days, if you have gains, you've won. You can realize short term gains and switch back, or not, as you see fit given your tax situation. If you have losses, harvest those and switch back. Having money you have allocated towards your stock holdings out of the market really is a sub-par plan.

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Earl Lemongrab
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Re: "Wash Sale" Questions

Postby Earl Lemongrab » Fri May 19, 2017 3:35 pm

Personally I don't think those are a wash. In fact I don't think that funds from different fund families are substantially identical even if they follow the same index. However, there is no guidance from the IRS or Congress, and there are essentially no cases anyone has found where the IRS has declared such a wash.

You know as much as anyone if you've read the IRS publications. Everything else is opinion.
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