Wash sale question- are ITOT and VTI Substantially Identical?

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

Post by samsoes » Mon Apr 02, 2018 3:29 pm

alex_686 wrote:
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.
Understood, but I'll rely on the meanings of the words (below) when determining potential wash sales involving cross-account, cross-custodian, or cross account type (when an IRA or 401k is involved as the "buy" +/- 30 days).

When within the same account, I'll rely the brokerage's criteria to flag a loss in taxable as a wash sale or not.

Substantially: relating to the substance, matter, or material of a thing.
Identical: being the very same


Therefore, being the very same in substance, matter, or material. In other words, identical in substance.

(Edit: I do agree that a pair of funds or ETFs which track the same index are substantially identical, such as an S&P 500 index tracking fund from Schwab and an S&P 500 index tracking ETF from Fidelity. That's where I'll use the spirit of the regulation -- rather than the letter of it -- even though there may be minute tracking differences between the two. They are supposed to be the same thing.)
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iceport
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Mon Apr 02, 2018 3:45 pm

samsoes wrote:
Mon Apr 02, 2018 3:29 pm
When within the same account, I'll rely the brokerage's criteria to flag a loss in taxable as a wash sale or not.
You are aware, though, that the brokerage's requirements are different than yours, right?
"Discipline matters more than allocation.” ─William Bernstein

alex_686
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Mon Apr 02, 2018 3:52 pm

iceport wrote:
Mon Apr 02, 2018 3:45 pm
samsoes wrote:
Mon Apr 02, 2018 3:29 pm
When within the same account, I'll rely the brokerage's criteria to flag a loss in taxable as a wash sale or not.
You are aware, though, that the brokerage's requirements are different than yours, right?
I used to help create 1099s for brokerage firms. There I learned the difference between reportable transactions and taxable transactions. Brokers are responsible for reportable ones, you for taxable ones. Your failure to report is not the broker's responsibility.

A example would be selling a stock for a loss at one brokerage and buying it at another. The 2 brokers don't talk to each other so they won't report it as a wash sale. It is. Hopefully you won't be audited.

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

Post by Artsdoctor » Mon Apr 02, 2018 5:17 pm

iceport wrote:
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?"
Admittedly, my argument is going to be arbitrary, but I feel I could make it. However, in reference to your comment above, I could easily argue that "the market has just become too volatile and I want to sell my total market for a large cap fund because I feel it's just too dangerous to hold small caps at this time." You can use a flip argument for wanting to exchange out of a large cap fund for a total market cap fund. If you're talking about large sums of money, you may be putting your returns at risk even if it's a small amount, so there is some "risk" involved.

Remember, tax law can be idiosyncratic. We've debated the unique protection a 401k offers when it comes to selling in one account and buying the same fund in the 401k. You can argue that "spirit of the law" endlessly but the outcome will be the same.

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

Post by jalbert » Mon Apr 02, 2018 5:30 pm

dbr wrote:
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.
There is nothing in the spirit of the law that requires staying out of the market for 30 days. If you sell IBM stock at a loss and simultaneously buy Microsoft stock, you unequivocally have a legitimate loss even though the two stocks are unlikely to diverge much in performance over 30 days.

What about VOO (SP500) and VV (CRSP large cap index)? The latter has in excess of 600 stocks including about 100 stocks that S&P classifies as mid-cap. Their historical return is closer than VTI and ITOT. Regardless of the reason, I think it would difficult to argue VTI and ITOT were substantially the same given their small historical divergence in performance
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samsoes
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by samsoes » Tue Apr 03, 2018 6:56 am

iceport wrote:
Mon Apr 02, 2018 3:45 pm
samsoes wrote:
Mon Apr 02, 2018 3:29 pm
When within the same account, I'll rely the brokerage's criteria to flag a loss in taxable as a wash sale or not.
You are aware, though, that the brokerage's requirements are different than yours, right?
That's the point.
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iceport
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by iceport » Tue Apr 03, 2018 3:27 pm

samsoes wrote:
Tue Apr 03, 2018 6:56 am
iceport wrote:
Mon Apr 02, 2018 3:45 pm
samsoes wrote:
Mon Apr 02, 2018 3:29 pm
When within the same account, I'll rely the brokerage's criteria to flag a loss in taxable as a wash sale or not.
You are aware, though, that the brokerage's requirements are different than yours, right?
That's the point.
I'm not sure what you're driving at. Could you elaborate?

My point was that by following the rules for brokers and not the ones for you, you are introducing the possibility that you will run afoul of the rules for you. For example, if the IRS determines that a replacement fund is substantially identical to a fund you sold for a loss even though it doesn't have an identical Committee on Uniform Securities Identification Procedures (CUSIP) number — and thus wasn't reported by your broker — you may still be subject to the wash sale rules.
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samsoes
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by samsoes » Tue Apr 03, 2018 7:01 pm

iceport wrote:
Tue Apr 03, 2018 3:27 pm
samsoes wrote:
Tue Apr 03, 2018 6:56 am
iceport wrote:
Mon Apr 02, 2018 3:45 pm
samsoes wrote:
Mon Apr 02, 2018 3:29 pm
When within the same account, I'll rely the brokerage's criteria to flag a loss in taxable as a wash sale or not.
You are aware, though, that the brokerage's requirements are different than yours, right?
That's the point.
I'm not sure what you're driving at. Could you elaborate?

My point was that by following the rules for brokers and not the ones for you, you are introducing the possibility that you will run afoul of the rules for you. For example, if the IRS determines that a replacement fund is substantially identical to a fund you sold for a loss even though it doesn't have an identical Committee on Uniform Securities Identification Procedures (CUSIP) number — and thus wasn't reported by your broker — you may still be subject to the wash sale rules.
Indeed. As long as they're not identical in substance.
In addition, they may not have neither the identical International Securities Identification Number (ISIN) nor identical Stock Exchange Daily Official List (SEDOL) number. And don't get me started on Markets in Financial Instruments Directive (MiFID) 2 reporting requirements. That piece of regulatory rubbish is over 7,000 pages long!
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alex_686
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by alex_686 » Wed Apr 04, 2018 10:18 am

jalbert wrote:
Mon Apr 02, 2018 5:30 pm
What about VOO (SP500) and VV (CRSP large cap index)? The latter has in excess of 600 stocks including about 100 stocks that S&P classifies as mid-cap. Their historical return is closer than VTI and ITOT. Regardless of the reason, I think it would difficult to argue VTI and ITOT were substantially the same given their small historical divergence in performance
In my opinion, yes. Would "Alex 686 Custom 501 Large Cap" index, which contains the largest 501 free float market cap weighted stocks be substantially similar? Yes. Would , "Alex 686 Custom 1000 Large Cap" index? No. The IRS has never specifically drawn a line - I suppose to prevent people trying to game the system. The informal rule that is batted around is 80% overlap. There is more than a 80% overlap between VTI and ITOT - position by position, weight by weight - so in my opinion they are substantially similar. So - Yeah to subjective accounting definitions.

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

Post by Earl Lemongrab » Wed Apr 04, 2018 10:23 am

What does "substantially similar" have to do with it? It's "substantially identical". To me that's a tremendously high barrier to clear. Much more so than anything to do with similarity.
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samsoes
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Re: Wash sale question- are ITOT and VTI Substantially Identical?

Post by samsoes » Wed Apr 04, 2018 7:54 pm

Earl Lemongrab wrote:
Wed Apr 04, 2018 10:23 am
What does "substantially similar" have to do with it? It's "substantially identical". To me that's a tremendously high barrier to clear. Much more so than anything to do with similarity.
Agree wholeheartedly. Substantially identical (identical in substance) is indeed a tremendously high barrier, especially when dealing with funds/ETFs.
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