Wash sale question- are ITOT and VTI Substantially Identical?

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PrettyCoolWorkshop
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Wash sale question- are ITOT and VTI Substantially Identical?

Post by PrettyCoolWorkshop » Thu Mar 29, 2018 3:00 pm

I've got a deep-in-the-weeds, IRS-is-a-pain-in-the-butt sort of question. I sold some shares of ITOT in order to capital loss harvest. I keep all my funds on automatically reinvested dividends. Because a dividend had been paid within the last 30 days, this triggered a wash sale for that small portion of the lot. I'm fine with this. However, I also own VTI, which also paid a dividend within the last 30 days. Does this constitute a "substantially identical" security and trigger more wash sale lots?
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iceport
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Thu Mar 29, 2018 3:38 pm

That's a tough call, and a reasonable interpretation could go either way.

Some folks argue that funds managed by different companies can never meet the test of "substantially identical," even if they follow the same index. I disagree.

However, in your case, there's an additional factor to consider: the funds track different indexes. VTI tracks the CRSP US Total Market Index, while ITOT tracks the S&P Total Market Index. However, those two indexes are extremely similar. As of 2/28/18 VTI held 3646 stocks, and as of 3/27/18 ITOT held 3487.

Is that substantially identical?

Here is a link to an explanation from a tax professional. It's a very conservative interpretation (a little too conservative IMHO), and you are free to disagree with it, but it does help to clarify the question.

Substantially Identical Securities
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MP123
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by MP123 » Thu Mar 29, 2018 3:44 pm

Your broker won't report them as a wash sale. Whether you should or not is not clear.

I think they're pretty close but not "substantially identical". Others would disagree with that.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by dbr » Thu Mar 29, 2018 3:44 pm

Whether or not they are substantially identical there is no existing mechanism to "trigger" a wash sale unless you voluntarily do it to yourself. No broker is currently attempting to report wash sales that require them to determine that two not exactly identical funds are substantially identical.

I wonder if there is a penalty for filing a false income tax return if you decide to report a wash sale when there isn't one due to you making a misinterpretation of the law and "triggering" a false wash sale. No one has heard of anyone having an audit finding against them for failing to report a wash sale of not exactly identical mutual funds.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Nate79 » Thu Mar 29, 2018 3:48 pm

1. ITOT:
iShares Core S&P Total U.S. Stock Market ETF
ER: 0.03%
Fund tracks S&P Total Market Index
Number of holdings: 3,487
30 day SEC Yield: 1.72%
10 year return according to M*: $10k grows to $24,702.12

2. VTI
Vanguard Total Stock Market ETF
ER: 0.04%
Fund tracks CRSP US Total Market Index
Number of holdings: 3,546
30 day SEC Yield: 1.78%
10 year return according to M*: $10k grows to $25,137.38

In my book no, but just depends on how close you want to come to substantially identical.

They are for sure not identical. They don't track the same index, they do not have the same exact # of holdings, they do not have the same ER structure, they are from different companies, they have different SEC yields, and the total growth over last 10 years has been different.

Edited to add: in the worst case if you are ever audited you could easily take this explanation and tell the IRS this was your reasoning. The likelihood is near zero and in my book you are following the rules until the IRS defines substantially identical in much more exact terms.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Thu Mar 29, 2018 3:50 pm

dbr wrote:
Thu Mar 29, 2018 3:44 pm
I wonder if there is a penalty for filing a false income tax return if you decide to report a wash sale when there isn't one due to you making a misinterpretation of the law and "triggering" a false wash sale. No one has heard of anyone having an audit finding against them for failing to report a wash sale of not exactly identical mutual funds.
I have. Read about it 16 years ago. It involved private equity and involved employee bonuses that were in the millions. The accounting firm that assisted was also nailed.

I personally think that they are substantially identical but I have not heard about the IRS going after normal people.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Thu Mar 29, 2018 3:53 pm

Nate79 wrote:
Thu Mar 29, 2018 3:48 pm
They are for sure not identical. They don't track the same index, they do not have the same exact # of holdings, they do not have the same ER structure, they are from different companies, they have different SEC yields, and the total growth over last 10 years has been different.
When I was in accounting, the direction we got from the IRS was to focus on holdings, not any of the other stuff. The IRS refused to be pinned down to a specific test however the rule of thumb seemed to be a 80% overlap in holdings.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Nate79 » Thu Mar 29, 2018 4:05 pm

alex_686 wrote:
Thu Mar 29, 2018 3:53 pm
Nate79 wrote:
Thu Mar 29, 2018 3:48 pm
They are for sure not identical. They don't track the same index, they do not have the same exact # of holdings, they do not have the same ER structure, they are from different companies, they have different SEC yields, and the total growth over last 10 years has been different.
When I was in accounting, the direction we got from the IRS was to focus on holdings, not any of the other stuff. The IRS refused to be pinned down to a specific test however the rule of thumb seemed to be a 80% overlap in holdings.
At one point it was considered that 2 different mutual funds could not even be classified as substantially identical no matter their holdings (as late as about 2009):

viewtopic.php?t=54088
Regarding mutual funds, Publication 564 states, "Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund. For more information on wash sales, get Publication 550." Reading Publication 564 and being directed to Publication 550 might lead an investor to believe that selling a mutual fund for a loss and replacing it with a mutual fund (or ETF) that owns substantially identical securities (i.e., Vanguard S&P 500 Fund for the Fidelity Spartan 500 Fund) is an acceptable transaction under Section 1091, and that may be contrary to the views of many advisors and investors.
That was an old thread and I recall that the specific language was removed from the publication. Another poster said that substantially identical is extremely strong standard.

Here was an old article also on kitces:
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/
When it comes to mutual funds, though, the situation is murkier. Strictly speaking, the origin of the wash sale rules predates the first (open-ended) mutual fund, though with the passage of nearly 90 years since both have been in effect, there has still been remarkably little clarification on the issue. In former IRS Publication 564, the Service acknowledged that “ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund”, but without any clarification as to what circumstances two mutual funds could be substantially identical.
This topic is so murky that I am comfortable TLH ITOT and VTI based on the reasons I gave until the IRS gives more substantial guidance.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by dbr » Thu Mar 29, 2018 4:11 pm

alex_686 wrote:
Thu Mar 29, 2018 3:50 pm
dbr wrote:
Thu Mar 29, 2018 3:44 pm
I wonder if there is a penalty for filing a false income tax return if you decide to report a wash sale when there isn't one due to you making a misinterpretation of the law and "triggering" a false wash sale. No one has heard of anyone having an audit finding against them for failing to report a wash sale of not exactly identical mutual funds.
I have. Read about it 16 years ago. It involved private equity and involved employee bonuses that were in the millions. The accounting firm that assisted was also nailed.

I personally think that they are substantially identical but I have not heard about the IRS going after normal people.
Private equity doesn't sound like a mutual fund. There certainly are cases involving substantially but not exactly identical positions of things but I don't think ever for publicly traded mutual funds. I was reading one recently about some shenanigans involving bond issues, but those weren't mutual funds either.

The real question is what does it matter what the investor thinks or what anyone posting here thinks.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Thu Mar 29, 2018 4:16 pm

dbr wrote:
Thu Mar 29, 2018 4:11 pm
Private equity doesn't sound like a mutual fund. There certainly are cases involving substantially but not exactly identical positions of things but I don't think ever for publicly traded mutual funds. I was reading one recently about some shenanigans involving bond issues, but those weren't mutual funds either.
Most of the time the tax rules for funds are the same, regardless if it is public or private. Nor can I think of any reason why they should be treated differently. However I know the public side better so if anybody has better information I would like to hear.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by RudyS » Thu Mar 29, 2018 4:28 pm

How much money are we talking about? If it's just the dividends, maybe not too much to worry about IRS someday, somehow, revising your taxes due. And then that's only an issue if somehow the decision is that the funds ARE identical.
Last edited by RudyS on Thu Mar 29, 2018 4:29 pm, edited 1 time in total.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Thu Mar 29, 2018 4:28 pm

dbr wrote:
Thu Mar 29, 2018 3:44 pm
Whether or not they are substantially identical there is no existing mechanism to "trigger" a wash sale unless you voluntarily do it to yourself. No broker is currently attempting to report wash sales that require them to determine that two not exactly identical funds are substantially identical.
That's because the 1099-B reporting requirements for brokers don't require such reporting. But those rules are different than the tax code investors must comply with, so they really have no bearing on the interpretation of "substantially identical." I recently found a couple of explanations of the different rules for brokers and investors.

From a CPA: Wash Sale Loss Adjustments Can Be A Big Tax Return Headache

From TD Ameritrade: Wash Sale Tax Rules
It’s certainly a lot to keep track of, which is why your broker helps you out with some of it. But there are limitations. The IRS gave taxpayers and brokers different rule books when calculating wash sales. Here are a few of the basic differences:

Image

Does it seem like the broker is held to less stringent standards than the average taxpayer? Keep in mind that your broker is not privy to all your accounts across multiple firms, the identity of your spouse and all of their accounts, nor does it know what companies you may control. That would be a logistical nightmare! Plus, the term “substantially identical” leaves quite a bit of room for interpretation. Therefore, brokers cannot realistically track all applicable transactions.
The bottom line is that wash sale reporting is still largely based on the honor system. The fact that some wash sales are reported and others aren't has only confused things more than they were already, in my opinion.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by MP123 » Thu Mar 29, 2018 5:11 pm

Worth mentioning that if you do have a disallowed loss due to wash sale in a taxable account it gets added to the cost basis of the replacement security.

In other words you still get the loss, you just have to wait to realize it when you sell the replacement stock outside of the wash sale window.

Not the end of the world, maybe even useful in some circumstances. But it could throw a wrench in your tax planning if you aren't expecting it.

There does seem to be a great deal of anxiety about it though.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Earl Lemongrab » Thu Mar 29, 2018 7:37 pm

Basically there's nothing but opinions. There hasn't been an identified case of the IRS declaring a wash between different funds. My opinion is that this isn't a wash. The IRS says this in Pub 550:
Substantially identical. In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.

Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:

Is convertible into common stock,
Has the same voting rights as the common stock,
Is subject to the same dividend restrictions,
Trades at prices that do not vary significantly from the conversion ratio, and
Is unrestricted as to convertibility.
I think the phrase "In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case" is important. To me that means you don't focus on one thing, like the index. Other things, like the mutual fund company, matter.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by navyitaly » Thu Mar 29, 2018 8:03 pm

Being real who cares for a normal guy. If you got audited it’s a mistake if you lost pay the difference and move on. You aren’t getting charged w a crime over a mistake. We all make mistakes.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Epsilon Delta » Thu Mar 29, 2018 8:36 pm

dbr wrote:
Thu Mar 29, 2018 4:11 pm
The real question is what does it matter what the investor thinks or what anyone posting here thinks.
Until or unless the IRS publishes guidance or takes enforcement actions the view of the investor and their tax advisor are the only thing that matter.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by dbr » Thu Mar 29, 2018 8:46 pm

Epsilon Delta wrote:
Thu Mar 29, 2018 8:36 pm
dbr wrote:
Thu Mar 29, 2018 4:11 pm
The real question is what does it matter what the investor thinks or what anyone posting here thinks.
Until or unless the IRS publishes guidance or takes enforcement actions the view of the investor and their tax advisor are the only thing that matter.
Why? I say that until the IRS decides something what the investor and his tax advisors think is utterly irrelevant. The investor does have to decide what he is going to do, of course, but that is just a choice between volunteering a wash sale, risking not reporting a wash sale, or perhaps to not have wash sales by just waiting 30 days and buying back the position.

Of course, just to be a smart alec, one might point out that if some means can be found to manipulate the tax code by reporting a wash sale where there is none the risk on audit is just a serious as failing to report a wash sale.
Last edited by dbr on Thu Mar 29, 2018 9:05 pm, edited 1 time in total.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Thu Mar 29, 2018 8:59 pm

Earl Lemongrab wrote:
Thu Mar 29, 2018 7:37 pm
I think the phrase "In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case" is important. To me that means you don't focus on one thing, like the index. Other things, like the mutual fund company, matter.
I will disagree. I view this as part of the construed sale rules. Transactions must have a economic reason, not a tax reason. Consider a situation were you sell the Vangaurd S&P 500 mutual fund and buy one of the following:
Fidelity 500 mutual fund
S&P 500 futures
Deep in the money puts on the S&P 500
Alex_686's S&P 499 Fund - just like the S&P 500, expect with thhe 499 largest stocks.

Which of these substationally alters your economic expsourer? I would argue none of them do.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by saltycaper » Thu Mar 29, 2018 9:00 pm

To me, the ER, index, fund company, and number of holdings are not relevant. If most of the weighted holdings overlap, the funds are substantially identical. Further, if I was in a position to audit someone, and they tried to argue otherwise, I'd take that as an indication they might be lax in their interpretation of other aspects of the tax code, and I would generally be irritated by their attempt to skirt the intent of the rules. Time to bring the hammer down.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Epsilon Delta » Thu Mar 29, 2018 9:05 pm

dbr wrote:
Thu Mar 29, 2018 8:46 pm
Epsilon Delta wrote:
Thu Mar 29, 2018 8:36 pm
dbr wrote:
Thu Mar 29, 2018 4:11 pm
The real question is what does it matter what the investor thinks or what anyone posting here thinks.
Until or unless the IRS publishes guidance or takes enforcement actions the view of the investor and their tax advisor are the only thing that matter.
Why? I say that until the IRS decides something what the investor and his tax advisors think is utterly irrelevant. The investor does have to decide what he is going to do, of course, but that is just a choice between volunteering a wash sale, risking not reporting a wash sale, or perhaps to not have wash sales by just waiting 30 days and buying back the position.
Because the tax payer's opinion determine what goes on the tax return and what taxes are paid. The IRS could change that in an audit, and various courts could make further changes. But there is no sign the IRS even has an opinion on any but the most obvious cases, so in practice the tax payer's opinion decides the issue.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Thu Mar 29, 2018 9:13 pm

Nate79 wrote:
Thu Mar 29, 2018 4:05 pm
Here was an old article also on kitces:
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/
Thanks for that outstanding article! It's well worth the time to read. (The more I read of Kitces, the more impressed I become.)

Kitces provides the historic context that is often missing from these discussions.
Executive Summary

Harvesting capital losses to generate a current tax savings is popular. So popular, in fact, that not long after the US income tax was first created a century ago, the strategy was rapidly adopted as a tax savings technique and became a perceived tax abuse. In turn, this lead to the establishment of one of the first pieces of legislation to close an “abusive” tax loophole, and we now know Congress’ solution as the “wash sale” rules.

Yet the challenge of the wash sale rules is that the requirement not to own a “substantially identical” stock or bond within the 61-day wash sale period was rather straightforward to apply in its day, but has become outdated given the rise of pooled investment vehicles like mutual funds, and especially with the explosion of index ETFs. Now, taxpayers face oddly disparate treatment, where it’s not permitted to harvest the loss on a stock that’s down and replace with the same stock, but it’s “fine” to harvest the loss on a mutual fund that’s down and replace it with another mutual fund that owns overlapping securities.

Ultimately, the spirit of the wash sale rules was that investors should be required to endure some “tracking error” risk with the replacement security owned during the wash sale period… which means swapping ETFs with a 0.99+ correlation to harvest a loss without any risk of a performance difference almost certainly violates Congressional intent. And while it remains to be seen whether the IRS will become more aggressive in pursuing the issue, and/or whether Congress will attack this abusive “tax loophole” once again, the fact that there has been no action to limit the abuses yet does not protect taxpayers who are in clear violation of the spirit and intent of the rules in the first place. So investors should at least be cautious to consider how far they push the limits with tax loss harvesting (TLH) of mutual funds and ETFs.
Does Tax Loss Harvesting “Almost” Substantially Identical Mutual Funds And ETFs Trigger A Wash Sale Problem?

This thoughtful article walks us through how the application of the wash sale rules became successively more ambiguous over time, first as mutual funds became available, and then more so as index mutual funds became available. Kitces lends credibility to the argument that the whole "stocks or securities of one corporation" vs. "stocks or securities of another corporation" test is obsolete, at least when it comes to the likes of modern index funds, which were never envisioned in the original legislation. That's been my opinion for a while now — since I did my first TLH in 2008 and read up on the rules.

Where that leaves us all is still smack in the middle of a judgement call, or in the vernacular of the IRS, considering "all the facts and circumstances."
Last edited by iceport on Thu Mar 29, 2018 9:17 pm, edited 1 time in total.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by dbr » Thu Mar 29, 2018 9:14 pm

Epsilon Delta wrote:
Thu Mar 29, 2018 9:05 pm
dbr wrote:
Thu Mar 29, 2018 8:46 pm
Epsilon Delta wrote:
Thu Mar 29, 2018 8:36 pm
dbr wrote:
Thu Mar 29, 2018 4:11 pm
The real question is what does it matter what the investor thinks or what anyone posting here thinks.
Until or unless the IRS publishes guidance or takes enforcement actions the view of the investor and their tax advisor are the only thing that matter.
Why? I say that until the IRS decides something what the investor and his tax advisors think is utterly irrelevant. The investor does have to decide what he is going to do, of course, but that is just a choice between volunteering a wash sale, risking not reporting a wash sale, or perhaps to not have wash sales by just waiting 30 days and buying back the position.
Because the tax payer's opinion determine what goes on the tax return and what taxes are paid. The IRS could change that in an audit, and various courts could make further changes. But there is no sign the IRS even has an opinion on any but the most obvious cases, so in practice the tax payer's opinion decides the issue.
But the issue to be decided is not what goes on the tax return or what taxes will be paid but rather what risk the taxpayer will somehow end up liable for a cost on audit. The question is one of risk. The question is not to judge the right answer but to judge the cost of being wrong. I think the estimate of the chance of being wrong and paying for it is about as near zero as anything ever is. If nothing else it seems to me highly likely that if the situation is ever clarified that there is not going to be retroactive enforcement, though someone who understands that better than I might comment.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Earl Lemongrab » Thu Mar 29, 2018 11:11 pm

alex_686 wrote:
Thu Mar 29, 2018 8:59 pm
Earl Lemongrab wrote:
Thu Mar 29, 2018 7:37 pm
I think the phrase "In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case" is important. To me that means you don't focus on one thing, like the index. Other things, like the mutual fund company, matter.
I will disagree. I view this as part of the construed sale rules. Transactions must have a economic reason, not a tax reason. Consider a situation were you sell the Vangaurd S&P 500 mutual fund and buy one of the following:
Fidelity 500 mutual fund
S&P 500 futures
Deep in the money puts on the S&P 500
Alex_686's S&P 499 Fund - just like the S&P 500, expect with thhe 499 largest stocks.

Which of these substationally alters your economic expsourer? I would argue none of them do.
None of that is mentioned in the wash rules. You're dragging in something from elsewhere in the tax code. Where is the relevance? There is nothing at all about economic exposure.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Nate79 » Thu Mar 29, 2018 11:26 pm

The last guidance from the IRS was actually pretty clear. Two different mutual funds can not be substantially identical. Period. Until someone points to to IRS guidance that gives any further direction on the matter people should stop making up rules with no basis. I think there is no reason to TLH to a fund that tracks the same index. But if a mutual fund tracks a different index I think it is perfectly fine.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Fri Mar 30, 2018 4:27 am

alex_686 wrote:
Thu Mar 29, 2018 8:59 pm
Transactions must have a economic reason, not a tax reason. Consider a situation were you sell the Vangaurd S&P 500 mutual fund and buy one of the following:
Fidelity 500 mutual fund
S&P 500 futures
Deep in the money puts on the S&P 500
Alex_686's S&P 499 Fund - just like the S&P 500, expect with thhe 499 largest stocks.

Which of these substationally alters your economic expsourer? I would argue none of them do.
Well, now you're firmly within the realm of the intent of the wash sale rules: to prevent investors from claiming losses without substantively changing their market exposure. Should anyone really care about that? :wink:

I'm only half-joking. It occurs to me that by not clarifying and/or revising the wash sale rules to account for modern retail investing products, the IRS has, in effect, allowed the tax shelter of wash sales to grow back.

Before 1921, harvesting losses by creating what became known as wash sales was perfectly legal. By defining and disallowing the practice, the the use of that particular tax shelter was curtailed for a while. But today, a whole business model has developed touting the automated use of mutual funds — index funds in particular — to violate the spirit of the wash sale rule while, arguably, complying with the letter of law. Flagrantly violating the spirit of the wash sale rule with effectively identical, if not "substantially identical," index fund substitutions has become common practice. Is it so unreasonable to conclude that by not addressing this gaping tax loophole the IRS is effectively sanctioning it?

The recent cost basis reporting regulations give the impression that the government cares about the revenue loss. But it's not exactly a secret that it's now a cinch to walk openly and confidently through the available loophole and take advantage of the resulting tax shelter.

And as easy as it seems to legally violate the spirit of the law, it seems many are now emboldened to test the letter of the law, too.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by jhfenton » Fri Mar 30, 2018 7:41 am

iceport wrote:
Thu Mar 29, 2018 9:13 pm
Nate79 wrote:
Thu Mar 29, 2018 4:05 pm
Here was an old article also on kitces:
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/
Thanks for that outstanding article! It's well worth the time to read. (The more I read of Kitces, the more impressed I become.)
You and I have the opposite reaction to Mr. Kitces. The discussion of fund overlap is valid, but oohing and aahing over apparently-high correlation numbers is silly. Between any two equity investments, beta is going to dominate and you're going to have a high correlation. Single-stock correlations in the same industry are often over 90%:

AAPl<->MSFT = 0.9048 (tech)
USB<->WFC = 0.8973 (banking)

(Daily correlation over the trailing 12 months)

Those were not hard to find. AAPL<->MSFT was literally the first one I checked.

VB (Vanguard Small Cap) and VOO (Vanguard 500) are 0.9799 correlated over the trailing 12 months, and they have zero overlap. No one, except perhaps Mr. Kitces, would entertain for a second the notion that VB and VOO are substantially identical.

As a practical matter, I steer a fairly wide berth around wash sales, because there is no need to do otherwise. I own VIOV (Vanguard S&P 600 Small Cap Value) in taxable, but VSIAX/VBR in tax-advantaged (plus DFA Small Cap I in my 401(k)). The correlation between VIOV and VBR last year was 0.9916, but no one but Mr. Kitces thinks those funds are substantially identical.

I do own VWO (Vanguard EM) in taxable and VEMAX (same) in our IRAs/Roths, but I just make sure to avoid any purchases or sales in our IRAs/Roths at the wrong time. (It is a moot point at the moment, because all of my VWO has large gains.)

If/when I need to TLH, I can sell VIOV and buy VWO in taxable (or vice versa). There's no question of any wash sale problems. If necessary, I can buy some VSIAX in tax-advantaged to replace the VIOV in my allocation.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Fri Mar 30, 2018 2:16 pm

jhfenton wrote:
Fri Mar 30, 2018 7:41 am
iceport wrote:
Thu Mar 29, 2018 9:13 pm
Nate79 wrote:
Thu Mar 29, 2018 4:05 pm
Here was an old article also on kitces:
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/
Thanks for that outstanding article! It's well worth the time to read. (The more I read of Kitces, the more impressed I become.)
You and I have the opposite reaction to Mr. Kitces. The discussion of fund overlap is valid, but oohing and aahing over apparently-high correlation numbers is silly. Between any two equity investments, beta is going to dominate and you're going to have a high correlation. Single-stock correlations in the same industry are often over 90%:

AAPl<->MSFT = 0.9048 (tech)
USB<->WFC = 0.8973 (banking)

(Daily correlation over the trailing 12 months)

Those were not hard to find. AAPL<->MSFT was literally the first one I checked.

VB (Vanguard Small Cap) and VOO (Vanguard 500) are 0.9799 correlated over the trailing 12 months, and they have zero overlap. No one, except perhaps Mr. Kitces, would entertain for a second the notion that VB and VOO are substantially identical.
You make an excellent point about correlations. Correlation (alone) is probably not the best measure of substantial identicality (identicalness?). Fund management methods, portfolio construction and/or measures of security overlap would probably be more valid ways to compare potential replacement funds.

Aside from that specific criticism, I appreciate Kitces' focus on the concept of requiring some real degree of risk to the investor attempting to harvest a tax-loss, a risk of underperforming their original position. That was the original intent of the wash sale rule. And Kitces explains especially clearly the practical challenges to ensuring that risk is assumed by an index fund investor.

As Kaye Thomas wrote, "The bottom line is that risk and the wash sale rule are tied together. If you have a strategy that completely eliminates risk from your sale and repurchase, it's likely that you have a wash sale. You can't report a loss for tax purposes without changing your investment position."

If we start losing sight of that original intent, to the point where we question how altering one's economic exposure is even relevant to the wash sale rules, the Kitces article provides a welcome perspective.
jhfenton wrote:
Fri Mar 30, 2018 7:41 am
As a practical matter, I steer a fairly wide berth around wash sales, because there is no need to do otherwise.
I agree with you on this also. It's simple enough to use an easily defensible replacement fund, I see no reason to attempt to use a hardly defensible replacement.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by nisiprius » Fri Mar 30, 2018 3:38 pm

Nobody knows. There is probably no issue but what's the point of sailing close to the wind? It's only for 31 days. How different can the returns for one month between Total Stock and an S&P 500 ETF like SPY or VOO possibly be? It can't possibly matter much--and yet surely there are substantially differences between the two funds, since VTI holds 3,000 stocks not held by SPY or VOO, and puts 20% of its money into them.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Earl Lemongrab » Fri Mar 30, 2018 4:42 pm

iceport wrote:
Fri Mar 30, 2018 2:16 pm
Aside from that specific criticism, I appreciate Kitces' focus on the concept of requiring some real degree of risk to the investor attempting to harvest a tax-loss, a risk of underperforming their original position. That was the original intent of the wash sale rule. And Kitces explains especially clearly the practical challenges to ensuring that risk is assumed by an index fund investor.
But there's nothing in the law or the IRS publications requiring any such "risk". Kitces is fine when he sticks to explaining facts. When he goes off into these speculations on IRS policy, he muddies the waters. Recall all the nonsense about step transactions and backdoor Roth.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by bling » Fri Mar 30, 2018 4:54 pm

for me i draw the line at whether they track the same index or not, which means, i do not consider VTI and ITOT to be substantially similar.

but forget about VTI/ITOT and take a look at VOO/VXF.

VTI = 81% VOO + 19% VXF

if you sold VTI and bought VOO/VXF afterwards, you probably wouldn't even have a single stock which is different before vs after. your portfolio, down to the stock, hasn't changed, yet no one would argue that this is a wash sale.....seems weird to me.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Artsdoctor » Fri Mar 30, 2018 5:23 pm

nisiprius wrote:
Fri Mar 30, 2018 3:38 pm
Nobody knows. There is probably no issue but what's the point of sailing close to the wind? It's only for 31 days. How different can the returns for one month between Total Stock and an S&P 500 ETF like SPY or VOO possibly be? It can't possibly matter much--and yet surely there are substantially differences between the two funds, since VTI holds 3,000 stocks not held by SPY or VOO, and puts 20% of its money into them.
This. There are so many other things that can blow up on you, why would you want to play around with this? The chances are high that you'd not have any problems exchanging one for the other, but why would you even bother running afoul of the wash sale rule? Exchanging a total market fund for a, S&P fund would be 100% safe so I don't think there's a reason not to. And I think Kitces is doing more than just rambling; the "spirit of the law" is an important concept.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by bling » Fri Mar 30, 2018 6:20 pm

nisiprius wrote:
Fri Mar 30, 2018 3:38 pm
Nobody knows. There is probably no issue but what's the point of sailing close to the wind? It's only for 31 days. How different can the returns for one month between Total Stock and an S&P 500 ETF like SPY or VOO possibly be? It can't possibly matter much--and yet surely there are substantially differences between the two funds, since VTI holds 3,000 stocks not held by SPY or VOO, and puts 20% of its money into them.
it gets complicated if the price goes up and you don't want to sell to realize the gains. you've now tilted towards large-cap.... are you going to complicate your portfolio by buying mid/small cap funds to compensate?

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Artsdoctor » Fri Mar 30, 2018 8:20 pm

bling wrote:
Fri Mar 30, 2018 6:20 pm
nisiprius wrote:
Fri Mar 30, 2018 3:38 pm
Nobody knows. There is probably no issue but what's the point of sailing close to the wind? It's only for 31 days. How different can the returns for one month between Total Stock and an S&P 500 ETF like SPY or VOO possibly be? It can't possibly matter much--and yet surely there are substantially differences between the two funds, since VTI holds 3,000 stocks not held by SPY or VOO, and puts 20% of its money into them.
it gets complicated if the price goes up and you don't want to sell to realize the gains. you've now tilted towards large-cap.... are you going to complicate your portfolio by buying mid/small cap funds to compensate?
No. During the 2008-2009 meltdown, I tax-loss harvested to a degree that I had never done before (or since). I wound up TLH-ing in early March, at the nadir, to the Large Cap Stock index. I was never really able to sell at a loss so I've kept it and gradually transferred it to my Donor Advised Fund(s). In the meantime, I purchased the tax-managed small cap fund to round out any large cap bias (and in the general scheme of things, there was very little), and began all over purchasing total stock market. Ten years later, the large cap fund is a relatively small portion of my portfolio and my portfolio mirrors total stock.

This is really a case where you can get bogged down in the details, but the big picture is different. It's amazing how resilient your portfolio can be.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by bling » Sat Mar 31, 2018 11:35 am

Artsdoctor wrote:
Fri Mar 30, 2018 8:20 pm
No. During the 2008-2009 meltdown, I tax-loss harvested to a degree that I had never done before (or since). I wound up TLH-ing in early March, at the nadir, to the Large Cap Stock index. I was never really able to sell at a loss so I've kept it and gradually transferred it to my Donor Advised Fund(s). In the meantime, I purchased the tax-managed small cap fund to round out any large cap bias (and in the general scheme of things, there was very little), and began all over purchasing total stock market. Ten years later, the large cap fund is a relatively small portion of my portfolio and my portfolio mirrors total stock.

This is really a case where you can get bogged down in the details, but the big picture is different. It's amazing how resilient your portfolio can be.
i'm not too familiar with DAFs, but if you transferred to a DAF then you didn't have to pay capital gains tax right?

also, i'm slightly confused with your reply because it is the perfect example of what i was warning people about -- lack of simplicity. if you go from VTI <-> ITOT, if the price goes down, you TLH again, if the price goes up, you do nothing -- done. in your example, you had to "gradually transfer" to a DAF, *and* you had to buy a small-cap fund, all which increases complexity.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Sat Mar 31, 2018 11:56 am

A casual search turned up a valuable resource in considering the question of whether two securities are "substantially identical." The one caveat I must make is that the author, Garrett M. Fischer, Washington University School of Law, makes one huge, glaring error that I'll identify below. That error does not, in my opinion, negate the value of the rest of this legal review.

New Twists on an Old Plot: Investors Look to Avoid the Wash Sale Rule by Harvesting Tax Losses with Exchange-Traded Funds

A couple of key observations:

First, there is good reason every serious consideration of the wash sale rule makes the connection between a wash sale and an investor's change in economic position. Apparently, it was part of a 1939 ruling by the Third Circuit in Hanlon v. Commissioner.
The United States Court of Appeals for the Third Circuit in Hanlin v. Commissioner sought to bring some clarity to the term "substantially identical." The Third Circuit asserted that, in the context of the Wash Sale Rule, "[t]he words 'substantially identical' indicate that something less than precise correspondence will suffice to make the transaction a wash sale." But rather than define how much "less than precise correspondence" is necessary to find that securities are "substantially identical," the Third Circuit stated that "the 'something' less that is required consists of economic correspondence exclusive of differentiations so slight as to be unreflected in the acquisitive and proprietary habits of stocks and securities." In other words, Hanlin held that the security does not have to be identical, but it cannot leave the taxpayer in the same economic position in which he was prior to the Wash Sale transaction.
Hanlin, 108 F.2d at 430. The Third Circuit further explains that [w]hen the taxpayer‘s ability to pay is diminished by the realization of losses, these losses should and do operate to reduce his tax. The wash sales provision is designed to eliminate fictitious losses. As losses are a matter of economics, so the fiction lies in the lack of any change in the economic position on the part of the taxpayer.
Second, "while the IRS has failed to formally articulate the risk distinction set forth above, investment advisors have developed an industry-accepted 'list of transactions that are generally considered to be acceptable under the wash sale rule set forth in Section 1091.'" (I was unaware of the existence of this formal list.)
While trying to discern the Wash Sale Rule, industry practitioners have developed a list of four mutual fund transactions that are "generally considered to be acceptable" under Section 1091. Lee C. McGowan, Tax-Loss Harvesting: The Rebalancing Act, J. FIN. PLAN. E-NEWSLETTER (Dec. 2008), http://www.fpajournal.org/BetweentheIss ... ancingAct/.
This list includes the following:
  1. Sell one index fund and buy another index fund, if the indexes of the two funds are not the same index (e.g., S&P 500 for Russell 1000).
  2. Sell one actively managed fund and buy a fund at another company with different portfolio managers.
  3. Sell an index fund and buy an actively managed fund regardless of the fund company.
  4. Sell an actively managed fund and buy an index fund regardless of the fund company.
As the author notes, "Missing from the list of industry-accepted transactions is the situation in which an investor sells his ETF shares at a loss, deducts his capital loss, and then purchases shares of an ETF that tracks the same index but was created by a different company. Such a transaction seems to allow an investor to maintain the same economic position since the two ETFs are tracking the same index and thus, in theory, should be accurately tracking the price of the underlying securities of the index."

So what's the glaring error? Fischer seems to confuse the mutual fund structure with active management.
For example, consider an investor who sells his stake in the Vanguard 500 Index Fund (VFINX) — an actively managed mutual fund that seeks to track the S&P 500 — and then quickly purchases shares of an ETF that tracks the S&P 500, such as S&P Deposit Receipts (SPY).
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by dbr » Sat Mar 31, 2018 11:59 am

I guess people just can't stand the idea of staying out of the market for 30 days and buying back the position. How often are people selling for tax losses anyway. I haven't done it for years, but everyone's situation is different.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Sat Mar 31, 2018 12:29 pm

dbr wrote:
Sat Mar 31, 2018 11:59 am
I guess people just can't stand the idea of staying out of the market for 30 days and buying back the position. How often are people selling for tax losses anyway. I haven't done it for years, but everyone's situation is different.
You're right! I certainly couldn't stand to stay out of the market for 30 days. It would be tolerable with a bond fund, but with a volatile equity fund? Forget it! The losses would have to be huge — as they were in 2008/2009 — to entice me to realize them without the ability to stay invested.

During a recent rollover, a measly $12k liquidated from the Vanguard Real Estate index fund cost me $400 while it was out of the market for 5 days. I absolutely hate that sort of thing.

Thankfully, the wash sale rule offers enough flexibility that it's unnecessary to stay out of the market.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by bling » Sat Mar 31, 2018 12:48 pm

dbr wrote:
Sat Mar 31, 2018 11:59 am
I guess people just can't stand the idea of staying out of the market for 30 days and buying back the position. How often are people selling for tax losses anyway. I haven't done it for years, but everyone's situation is different.
if you are investing monthly there are a ton of opportunities.

and we don't even need to look far back in history to see why being out of the market for 30 days is a bad idea....let's look at 2018.

the market was at its peak at the end of january -- the same time most people get paid. pay off your bills, buy some stocks. oops, market correction happens, and you time it perfectly and TLH on 2/8, the lowest point. you hold cash for 30 days. it's now march 11, so you buy, which happens to be the most recent peak.

your cash just missed out on ~8% on the way up.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Earl Lemongrab » Sat Mar 31, 2018 12:50 pm

dbr wrote:
Sat Mar 31, 2018 11:59 am
I guess people just can't stand the idea of staying out of the market for 30 days and buying back the position. How often are people selling for tax losses anyway. I haven't done it for years, but everyone's situation is different.
Why would you though? It's easier and safer to swap to an acceptable substitute. If people are concerned about getting stuck with a fund they don't want, a solution is to go to cash in taxable, sell bonds in tax-advantaged to buy the substitute, then in 30 days reverse that. Now, that removes the possibilty of a double-dip TLH that you would get if there were losses in the substitute shares, as you can't harvest a loss in tax-advantaged of course.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by grabiner » Sat Mar 31, 2018 1:25 pm

iceport wrote:
Sat Mar 31, 2018 11:56 am
A casual search turned up a valuable resource in considering the question of whether two securities are "substantially identical." The one caveat I must make is that the author, Garrett M. Fischer, Washington University School of Law, makes one huge, glaring error that I'll identify below. That error does not, in my opinion, negate the value of the rest of this legal review.

New Twists on an Old Plot: Investors Look to Avoid the Wash Sale Rule by Harvesting Tax Losses with Exchange-Traded Funds
He may have missed another point:
In turn, when analyzing § 1.1233 as though it were explaining "substantially identical" for use in § 1091, it becomes clear that the exceptions to the general rule that securities of different corporations may not be substantially identical primarily involve situations where the securities are transferable into other securities, which is not the case here.
In fact, because of the way ETFs work, this the case for two ETFs tracking the same index, at least for institutional investors. An institution could buy creation units of shares of VOO, convert those shares to the 500 stocks in the S&P 500 index, and then convert those stocks into creation units of IVV. (This also serves as an arbitrage mechanism; if VOO is underpriced relative to IVV, the authorized participant can buy VOO long, sell IVV short, and use this conversion process to eliminate the long and short positions.) This is an argument that VOO and IVV are substantially identical.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by Artsdoctor » Sat Mar 31, 2018 4:39 pm

bling wrote:
Sat Mar 31, 2018 11:35 am
Artsdoctor wrote:
Fri Mar 30, 2018 8:20 pm
No. During the 2008-2009 meltdown, I tax-loss harvested to a degree that I had never done before (or since). I wound up TLH-ing in early March, at the nadir, to the Large Cap Stock index. I was never really able to sell at a loss so I've kept it and gradually transferred it to my Donor Advised Fund(s). In the meantime, I purchased the tax-managed small cap fund to round out any large cap bias (and in the general scheme of things, there was very little), and began all over purchasing total stock market. Ten years later, the large cap fund is a relatively small portion of my portfolio and my portfolio mirrors total stock.

This is really a case where you can get bogged down in the details, but the big picture is different. It's amazing how resilient your portfolio can be.
i'm not too familiar with DAFs, but if you transferred to a DAF then you didn't have to pay capital gains tax right?

also, i'm slightly confused with your reply because it is the perfect example of what i was warning people about -- lack of simplicity. if you go from VTI <-> ITOT, if the price goes down, you TLH again, if the price goes up, you do nothing -- done. in your example, you had to "gradually transfer" to a DAF, *and* you had to buy a small-cap fund, all which increases complexity.
I will admit that I am not an IRS agent. I have always interpreted the wash sale "spirit of the law" as meaning that you may "get stuck" with something, meaning that there has been "risk" (i.e., "getting stuck" with the large cap fund). I had no way of knowing in March, 2009, that it was the nadir of the market but I was content to keep the large cap fund. Over the years, its cost basis was the lowest of all of my investments so it seemed like a natural donor fund for my DAFs (and yes, you don't pay the capital gains tax on highly-appreciate donor shares).

You'll probably be just fine exchanging ITOT for VTI. It's just that, for me, avoiding any raised IRS eyebrows when there's ambiguity is the ultimate in keeping something simple. I wouldn't mind going head-to-head with an agent if I could believe what I was arguing. Here, I don't think I could make a convincing argument regarding ITOT and VTI. That's just me.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by jalbert » Sun Apr 01, 2018 4:25 pm

If VTI and ITOT are wash sale pairs, but VTI and VOO are legitimate TLH pairs, then this backtest becomes interesting:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by samsoes » Sun Apr 01, 2018 4:45 pm

"Substantially identical" means identical in substance - being made out of the exact same stuff.

If two funds aren't identical in substance, they aren't substantially identical.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by triceratop » Sun Apr 01, 2018 5:04 pm

jalbert wrote:
Sun Apr 01, 2018 4:25 pm
If VTI and ITOT are wash sale pairs, but VTI and VOO are legitimate TLH pairs, then this backtest becomes interesting:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
ITOT has not followed the same index throughout its history. It switched to a total market index only recently.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by nisiprius » Sun Apr 01, 2018 5:44 pm

samsoes wrote:
Sun Apr 01, 2018 4:45 pm
"Substantially identical" means identical in substance - being made out of the exact same stuff.

If two funds aren't identical in substance, they aren't substantially identical.
That doesn't match my layman's reading of the passage iceport cited above: "Hanlin held that the security does not have to be identical, but it cannot leave the taxpayer in the same economic position in which he was prior to the Wash Sale transaction."
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by samsoes » Sun Apr 01, 2018 6:08 pm

nisiprius wrote:
Sun Apr 01, 2018 5:44 pm
samsoes wrote:
Sun Apr 01, 2018 4:45 pm
"Substantially identical" means identical in substance - being made out of the exact same stuff.

If two funds aren't identical in substance, they aren't substantially identical.
That doesn't match my layman's reading of the passage iceport cited above: "Hanlin held that the security does not have to be identical, but it cannot leave the taxpayer in the same economic position in which he was prior to the Wash Sale transaction."
Then they weren't substantially identical. They were more like "substantially similar" or "substantially sorta close."
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Mon Apr 02, 2018 1:37 pm

Artsdoctor wrote:
Sat Mar 31, 2018 4:39 pm
I will admit that I am not an IRS agent. I have always interpreted the wash sale "spirit of the law" as meaning that you may "get stuck" with something, meaning that there has been "risk" (i.e., "getting stuck" with the large cap fund). I had no way of knowing in March, 2009, that it was the nadir of the market but I was content to keep the large cap fund. Over the years, its cost basis was the lowest of all of my investments so it seemed like a natural donor fund for my DAFs (and yes, you don't pay the capital gains tax on highly-appreciate donor shares).

You'll probably be just fine exchanging ITOT for VTI. It's just that, for me, avoiding any raised IRS eyebrows when there's ambiguity is the ultimate in keeping something simple. I wouldn't mind going head-to-head with an agent if I could believe what I was arguing. Here, I don't think I could make a convincing argument regarding ITOT and VTI. That's just me.
I agree with your perspective almost entirely. The one possible exception is where we draw our respective lines on what it means to comply with the spirit of the law. I don't really think exchanging a cap-weighted total market index fund for a large cap blend fund complies with the spirit of the law. I did this very exchange in a TLH maneuver in late 2008. I was somewhat concerned that I would end up "stuck" in a fund I viewed less favorably, but I had absolutely no concern whatsoever that I would miss out on a market rebound within 30 days. And that, in my opinion, is what the spirit of the wash sale rule is all about: the risk of missing out on subsequent gains of the very security you sold for a loss. As has been noted before, I think the law is ill-suited for modern index funds and ETFs.

But at least it complies with the letter of the law. If you could avoid a wash sale by exchanging into an ETF that tracks exactly the same index, it begs the question: What on earth, then, is the point of the wash sale rule? Does the IRS just want to keep accountants employed? Seriously, how is that any different from selling the ETF and buying it back minutes later? We know that isn't allowed. The question we must ask is, "Why not?"
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by jalbert » Mon Apr 02, 2018 1:51 pm

triceratop wrote:
Sun Apr 01, 2018 5:04 pm
jalbert wrote:
Sun Apr 01, 2018 4:25 pm
If VTI and ITOT are wash sale pairs, but VTI and VOO are legitimate TLH pairs, then this backtest becomes interesting:

https://www.portfoliovisualizer.com/bac ... ion3_3=100
ITOT has not followed the same index throughout its history. It switched to a total market index only recently.
This only further distinguishes it from VTI from a wash sale perspective. The S&P Composite 1500 is also a total market index, it just has more stringent liquidity and investability screens than, say, the Russell 3000, which in turn is more stringent than the CRSP or S&P total market indices.
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by dbr » Mon Apr 02, 2018 1:56 pm

In my opinion all of these discussions are about finding ways to virtually violate the spirit of the law given that the letter of the law does not exist. I say "virtually" because I am not sure what it even means to violate the spirit of a law.

If people want to reject the option of staying out of the market for thirty days, then I say you are all on your own.

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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Mon Apr 02, 2018 2:04 pm

samsoes wrote:
Sun Apr 01, 2018 6:08 pm
nisiprius wrote:
Sun Apr 01, 2018 5:44 pm
samsoes wrote:
Sun Apr 01, 2018 4:45 pm
"Substantially identical" means identical in substance - being made out of the exact same stuff.

If two funds aren't identical in substance, they aren't substantially identical.
That doesn't match my layman's reading of the passage iceport cited above: "Hanlin held that the security does not have to be identical, but it cannot leave the taxpayer in the same economic position in which he was prior to the Wash Sale transaction."
Then they weren't substantially identical. They were more like "substantially similar" or "substantially sorta close."
Samsoes, from experience I would not recommend getting into this particular argument over semantics with a IRS agent. You will just piss them off. "Substantially" before a world is an adjective mean to a similar to a high degree, not being made out of the same identical substance. There is a fair amount of common law behind this.

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