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

Post by student » Fri Sep 07, 2018 10:02 pm

Sorry for bringing back an old thread. I was searching for VTI and ITOT, and it led me to this thread. VTI https://investor.vanguard.com/etf/profile/VTI has about 20% in financials and ITOT https://www.ishares.com/us/products/239 ... market-etf has about 14% in financials. So I thought, to me, this means they not substantially identical.

Then I looked at morningstar.com which says both at around 16% in financial services. http://portfolios.morningstar.com/fund/summary?t=VTI and http://portfolios.morningstar.com/fund/summary?t=ITOT MS does not have a category with the name financials. So is "financial services" the same as "financials"? Do Vanguard and ishare use the term "financials" differently?

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

Post by alex_686 » Fri Sep 07, 2018 11:11 pm

student wrote:
Fri Sep 07, 2018 10:02 pm
Sorry for bringing back an old thread. I was searching for VTI and ITOT, and it led me to this thread. VTI https://investor.vanguard.com/etf/profile/VTI has about 20% in financials and ITOT https://www.ishares.com/us/products/239 ... market-etf has about 14% in financials. So I thought, to me, this means they not substantially identical.

Then I looked at morningstar.com which says both at around 16% in financial services. http://portfolios.morningstar.com/fund/summary?t=VTI and http://portfolios.morningstar.com/fund/summary?t=ITOT MS does not have a category with the name financials. So is "financial services" the same as "financials"? Do Vanguard and ishare use the term "financials" differently?
First, they use different indexes. Sure, mostly the same but some slight differences.

Second, I bet they chose to use different industrial classification systems. Once again, mostly identical but some key differences. Morningstar uses their own system and applies to both. So "financial services" are about the same as "financials", just like a Toyota Camry is about the same as a Honda Accord. Same function, most of the same features, about the same quality, but different brands and some minor differences.

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

Post by student » Sat Sep 08, 2018 6:12 am

alex_686 wrote:
Fri Sep 07, 2018 11:11 pm
student wrote:
Fri Sep 07, 2018 10:02 pm
Sorry for bringing back an old thread. I was searching for VTI and ITOT, and it led me to this thread. VTI https://investor.vanguard.com/etf/profile/VTI has about 20% in financials and ITOT https://www.ishares.com/us/products/239 ... market-etf has about 14% in financials. So I thought, to me, this means they not substantially identical.

Then I looked at morningstar.com which says both at around 16% in financial services. http://portfolios.morningstar.com/fund/summary?t=VTI and http://portfolios.morningstar.com/fund/summary?t=ITOT MS does not have a category with the name financials. So is "financial services" the same as "financials"? Do Vanguard and ishare use the term "financials" differently?
First, they use different indexes. Sure, mostly the same but some slight differences.

Second, I bet they chose to use different industrial classification systems. Once again, mostly identical but some key differences. Morningstar uses their own system and applies to both. So "financial services" are about the same as "financials", just like a Toyota Camry is about the same as a Honda Accord. Same function, most of the same features, about the same quality, but different brands and some minor differences.
Thanks for the reply. I agree that this seems to be the only reasonable explanation.

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

Post by alex_686 » Sat Sep 08, 2018 7:13 am

student wrote:
Sat Sep 08, 2018 6:12 am
Thanks for the reply. I agree that this seems to be the only reasonable explanation.
You can dig into reports and figure out who they are using for industrial classification. I used to do this for a living, so let me give you a example 10 years ago.

GICS, on of the major industrial classification providers, classified Carnival Cruse Lines as a financial. Why? Their hierarchy was:

Financials > REITS > Hotels and Resorts

Carnival acted like a resorts hotel, hotels and resorts act like REITs, and REITs belonged in Financials back then. Everything so logical yet wrong.

S&P put Carnival in consumer discretion instead of hotels and resorts.

Eh, lots of subjective decisions.

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

Post by student » Sat Sep 08, 2018 8:20 am

alex_686 wrote:
Sat Sep 08, 2018 7:13 am
student wrote:
Sat Sep 08, 2018 6:12 am
Thanks for the reply. I agree that this seems to be the only reasonable explanation.
You can dig into reports and figure out who they are using for industrial classification. I used to do this for a living, so let me give you a example 10 years ago.

GICS, on of the major industrial classification providers, classified Carnival Cruse Lines as a financial. Why? Their hierarchy was:

Financials > REITS > Hotels and Resorts

Carnival acted like a resorts hotel, hotels and resorts act like REITs, and REITs belonged in Financials back then. Everything so logical yet wrong.

S&P put Carnival in consumer discretion instead of hotels and resorts.

Eh, lots of subjective decisions.
Thank you again for the explanation.

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

Post by MnD » Sat Sep 08, 2018 12:37 pm

The "wash sale" for selling purchasing non-identical mutual funds is the Bigfoot or Chupacabra of Bogleheads.org.
No-one has ever provided a single shred of evidence that the IRS has denied a loss from buying one mutual fund within 30 days of selling another mutual fund. Once again we could dreg up the 2009 IRS publication 564 on mutual funds which states:
“Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.”
https://www.irs.gov/pub/irs-prior/p564--2009.pdf

Even if two different funds attempt to track the same index, there is tracking error, full replication or sampling practices, sampling error, different cash levels, different practices and fund revenue from securities lending policies, different managers and custodians etc.

But I don't think that's going to quell concerns about the Bigfoot and Chupacabra. They are "out there" just like the wash sale from VTI and ITOT.
Some people just like to make up rules out of thin air like "80% overlap" and "charts plot just about on top of each other".

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

Post by Nate79 » Sat Sep 08, 2018 3:28 pm

MnD wrote:
Sat Sep 08, 2018 12:37 pm
The "wash sale" for selling purchasing non-identical mutual funds is the Bigfoot or Chupacabra of Bogleheads.org.
No-one has ever provided a single shred of evidence that the IRS has denied a loss from buying one mutual fund within 30 days of selling another mutual fund. Once again we could dreg up the 2009 IRS publication 564 on mutual funds which states:
“Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.”
https://www.irs.gov/pub/irs-prior/p564--2009.pdf

Even if two different funds attempt to track the same index, there is tracking error, full replication or sampling practices, sampling error, different cash levels, different practices and fund revenue from securities lending policies, different managers and custodians etc.

But I don't think that's going to quell concerns about the Bigfoot and Chupacabra. They are "out there" just like the wash sale from VTI and ITOT.
Some people just like to make up rules out of thin air like "80% overlap" and "charts plot just about on top of each other".
+1

Imagination run wild on BH. Making up rules willy nilly.

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

Post by mega317 » Sun Sep 09, 2018 8:01 am

To be fair/clear I don't think people are making up "rules" so much as determining what level of avoidance makes them comfortable. I might feel comfortable not giving Bigfoot a moment's consideration while someone else might avoid going more than x miles deep into the woods and another might avoid the woods altogether.

Choosing a large cap US stock fund instead of vti as a TLH partner will not affect anyone's life beyond the time it takes to make that decision. Feeling comfortable is an important part of life.

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

Post by student » Sun Sep 09, 2018 8:11 am

mega317 wrote:
Sun Sep 09, 2018 8:01 am
To be fair/clear I don't think people are making up "rules" so much as determining what level of avoidance makes them comfortable. I might feel comfortable not giving Bigfoot a moment's consideration while someone else might avoid going more than x miles deep into the woods and another might avoid the woods altogether.

Choosing a large cap US stock fund instead of vti as a TLH partner will not affect anyone's life beyond the time it takes to make that decision. Feeling comfortable is an important part of life.
Yes. After reading all the opinions, I think that a good argument can be made to use ITOT and VTI as TLH partners. Nevertheless, I do not feel comfortable enough. So my plan is to use S&P 500 and VTI as partners instead. I may add small cap separately if I have to hold S&P 500 long term.

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

Post by KyleAAA » Sun Sep 09, 2018 9:25 am

My own rule of thumb is that if it follows a different index, it is not substantially identical. I think that's probably overly conservative but it's a clear signal to go on and there are generally no shortage if ETFs out there following very-similar-but-not-quite-the-same indices to choose from.

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

Post by alex_686 » Sun Sep 09, 2018 11:11 am

KyleAAA wrote:
Sun Sep 09, 2018 9:25 am
My own rule of thumb is that if it follows a different index, it is not substantially identical. I think that's probably overly conservative but it's a clear signal to go on and there are generally no shortage if ETFs out there following very-similar-but-not-quite-the-same indices to choose from.
I think you mean aggressive, not conservative. The IRS has clawed back taxes in these situations. There were a rash of cases back in the early 2000s
MnD wrote:
Sat Sep 08, 2018 12:37 pm
No-one has ever provided a single shred of evidence that the IRS has denied a loss from buying one mutual fund within 30 days of selling another mutual fund. Once again we could dreg up the 2009 IRS publication 564 on mutual funds which states:
“Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.”
https://www.irs.gov/pub/irs-prior/p564--2009.pdf
While technically correct I think this is misleading. First, the context is different actively managed funds, not similar index funds. Second, while I can't point to any fund to fund situations, I can point to situations that involved combinations of funds, underlying securities, futures, options, etc. The rules don't differentiate between different types of securities so I don't know why fund to fund would be excluded.
MnD wrote:
Sat Sep 08, 2018 12:37 pm
Some people just like to make up rules out of thin air like "80% overlap" and "charts plot just about on top of each other".
Let us put this in context. The IRS has never issued a regulation. That being said, the SEC does not issue ruling on what exactly stock manipulation is, nor the FBI on exactly what fraud is. You don't want people to game the system, you want to leave some desecration for prosecution of cases.

While the IRS has never asked for charts that I know of, when I worked in mutual fund accounting they did ask us to create percentage overlap tests, run them when we did trades like these, and store the information for 7 years. They did audit this. At the tax conferences, the scuttlebutt was 80% was the magic number.

I personally think this would generate a wash sale. I know the IRS has gone after million dollar tax bills, I know the IRS requires institutions to run overlap tests, and I know that the rules are identical. I only know of cases of the IRS going after big money and the transactions were abusive. I believe It is like going 69 miles in a 65 zone. It volatilizes the law but I doubt the cops are going to pull you over.

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

Post by MnD » Sun Sep 09, 2018 11:51 am

alex_686 wrote:
Sun Sep 09, 2018 11:11 am
KyleAAA wrote:
Sun Sep 09, 2018 9:25 am
My own rule of thumb is that if it follows a different index, it is not substantially identical. I think that's probably overly conservative but it's a clear signal to go on and there are generally no shortage if ETFs out there following very-similar-but-not-quite-the-same indices to choose from.
I think you mean aggressive, not conservative. The IRS has clawed back taxes in these situations. There were a rash of cases back in the early 2000s
MnD wrote:
Sat Sep 08, 2018 12:37 pm
No-one has ever provided a single shred of evidence that the IRS has denied a loss from buying one mutual fund within 30 days of selling another mutual fund. Once again we could dreg up the 2009 IRS publication 564 on mutual funds which states:
“Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.”
https://www.irs.gov/pub/irs-prior/p564--2009.pdf
While technically correct I think this is misleading. First, the context is different actively managed funds, not similar index funds. Second, while I can't point to any fund to fund situations, I can point to situations that involved combinations of funds, underlying securities, futures, options, etc. The rules don't differentiate between different types of securities so I don't know why fund to fund would be excluded.
MnD wrote:
Sat Sep 08, 2018 12:37 pm
Some people just like to make up rules out of thin air like "80% overlap" and "charts plot just about on top of each other".
Let us put this in context. The IRS has never issued a regulation. That being said, the SEC does not issue ruling on what exactly stock manipulation is, nor the FBI on exactly what fraud is. You don't want people to game the system, you want to leave some desecration for prosecution of cases.

While the IRS has never asked for charts that I know of, when I worked in mutual fund accounting they did ask us to create percentage overlap tests, run them when we did trades like these, and store the information for 7 years. They did audit this. At the tax conferences, the scuttlebutt was 80% was the magic number.

I personally think this would generate a wash sale. I know the IRS has gone after million dollar tax bills, I know the IRS requires institutions to run overlap tests, and I know that the rules are identical. I only know of cases of the IRS going after big money and the transactions were abusive. I believe It is like going 69 miles in a 65 zone. It volatilizes the law but I doubt the cops are going to pull you over.
Bigfoot and the Chupacabra are alive and well I see.
There is no "context" of active mutual funds in the IRS publication and language I provided. Again - "making things up".
The robo-advisory industry now exceeds $500 billion under management and is expected to expand to $7T by 2025. A key feature of the services is automated tax loss harvesting using matched pairs of index ETF's with 99.X% correlation and a very high degree of overlap. So your "scuttlebutt" of an 80% overlap criteria and the IRS going after "big money" is false or at least grossly outdated. The $500B robo advisory services advertise software managed tax loss harvesting using highly correlated index ETF's widely, including in detail in white papers. Here's some the published primary tax-loss harvesting pairs from Betterment. if the IRS is "going after this" I guess they don't have Google in their offices.

https://www.betterment.com/resources/re ... ite-paper/
US Total Stock Market
VTI CRSP US Total Market 0.04
SCHB Dow Jones U.S. Broad Stock Market 0.03

US Large-Cap Value Stocks
VTV CRSP US Large Cap Value 0.06
IVE S&P 500(R) Value 0.18

US Mid-Cap Value Stocks
VOE CRSP US Mid Cap Value 0.07
IWS Russell MidCap Value 0.25

US Small-Cap Value Stocks
VBR CRSP US Small Cap Value 0.07
IWN Russell 2000 Value 0.24

International Developed Stocks
VEA FTSE Developed ex North America 0.07
SCHF FTSE Developed ex-US 0.06

Emerging Market Stocks
VWO FTSE Emerging w/ China A shares 0.14
IEMG MSCI Emerging Markets Investable Market 0.14

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

Post by MnD » Sun Sep 09, 2018 2:52 pm

mega317 wrote:
Sun Sep 09, 2018 8:01 am
To be fair/clear I don't think people are making up "rules" so much as determining what level of avoidance makes them comfortable. I might feel comfortable not giving Bigfoot a moment's consideration while someone else might avoid going more than x miles deep into the woods and another might avoid the woods altogether.
If one limits or refrains from deep woods activity due to concerns about mountain lions or bears that's somewhat understandable. Despite the extreme unlikelihood of ending up as dinner for a mountain lion or bear, there is well documented evidence that it does happen on occasion. And there are many things that one might do to minimize this tiny risk even if one does venture into the woods.

But on a respected outdoor recreation forum, should an opinion to avoid going X miles into the woods or avoiding the woods altogether because of Bigfoot concerns be respected and go unchallenged? I think not, given that there has never been one shred of evidence to support the existence of Bigfoot. Likewise with those advising here to avoid tax-loss harvesting with highly correlated but different company index mutual funds or ETF's.

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

Post by mega317 » Sun Sep 09, 2018 3:10 pm

That's fair. I suppose my point also includes the fact (or at least my belief) that words typed by internet strangers are unlikely to change someone's comfort level with some risk that they believe exists, regardless of evidence. I don't know anthropology literature but I can think of one or two close analogies in medicine where this is supported by experimental evidence.

So I suppose that I agree it should be challenged, I have certainly done so in other threads, but it's also ok for people to make illogical or unsupported decisions when it makes them feel good and there are essentially no consequences.

I feel like choosing a different TLH partner is more like going 5 minutes out of your way to visit a different forest than avoiding the woods altogether.

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

Post by iceport » Wed Sep 12, 2018 12:17 pm

MnD wrote:
Sat Sep 08, 2018 12:37 pm
The "wash sale" for selling purchasing non-identical mutual funds is the Bigfoot or Chupacabra of Bogleheads.org.
No-one has ever provided a single shred of evidence that the IRS has denied a loss from buying one mutual fund within 30 days of selling another mutual fund.
This is an extremely flawed analogy. The existence of wash sale rule enforcement is different from the question of what the law requires.

For those seeking to obey the law with a good faith effort at interpreting vague and obsolete rules, simply claiming the IRS will never enforce them is of little help.
"Discipline matters more than allocation.” ─William Bernstein

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

Post by House Blend » Wed Sep 12, 2018 9:53 pm

MnD wrote:
Sun Sep 09, 2018 11:51 am
Bigfoot and the Chupacabra are alive and well I see.
There is no "context" of active mutual funds in the IRS publication and language I provided. Again - "making things up".
You seem to be forgetting that IRS Publications are not tax law.

Just today in another thread I pointed out a special case involving selling shares of a muni bond mutual fund at a loss where the rules described in Pub. 550 don't tell the whole story. In short, Pub. 550 is wrong.
viewtopic.php?p=4114725#p4114725

In any case, using the 2009 edition of Publication 564 as the final arbiter of what counts as "making things up" is a bit short sighted.

Tax geeks interested in the "what is substantially identical?" question may enjoy this white paper on the current state of understanding of what it means for individual bonds:
http://g2ft.com/papers/G2FTAdvancedTopi ... lBonds.pdf
“Substantially identical” was so poorly defined when initially introduced in 1921, that ever since then, Congress, the IRS and the U.S. Tax Court have created a collection of laws, regulations and rulings to more clearly define this vague concept. Tax practitioners and compliance officers can find reference to this term in no less than three sources:
Internal Revenue Code 1 (IRC)
Code of Federal Regulations (CFR)
Revenue Rulings (RR)
In addition, this concept is also discussed in legal precedents, many from the United States Tax Court. Navigating between these sources can be quite challenging.
Although it is critical to understand all of this documentation -- the IRC, CFR and RR -- when trying to establish whether or not two debt securities are substantially identical to one another, the U.S. judicial system is always the ultimate arbiter of whether two securities are or are not SI. Legal precedent can therefore override any of the above documents with regard to defining SI. As a result, in order to apply the term substantially identical to debt securities in the most accurate and comprehensive manner, we also need to examine relevant historical court cases and the legal precedents that followed them.

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

Post by MnD » Thu Sep 13, 2018 11:12 am

The argument that one can't "prove" that exchanging different mutual funds doesn't constitute a wash sale is the same argument that one can't prove the non-existence of Bigfoot and the chupacabra. You can't prove a negative, but a rational person is unconcerned about exchanging different funds to realize a loss or running into one of these mythical creatures when walking in the woods.

The guidance and examples are very clear and not "murky" or outdated.
Substantially identical with numerous examples of wash sales for the same exact security or direct derivatives of it (options etc.)

Different mutual funds do not even remotely pass the substantially identical test given numerous differences in various tracking indices used, how index tracking is accomplished (various sampling schemes or full replication), trading timing and practices, expense ratios, management teams, trustees, fund board of directors, income or lack thereof from securities lending, cash levels and cash management practices, use of repurchase agreements or not etc.

This is fully supported by the fact that no-one can provide even a single example of where a loss resulting from the sale and purchase of different mutual funds was identified and disallowed as a wash sale. In fact reporting a transaction of different mutual funds as as wash sale might fall under the definition of preparing a false tax return. Do you think the tax and legal compliance specialists at places like Betterment, Charles Schwab and others managing hundreds of billions of dollars in robo-advisory services with fund-pair tax loss harvesting featured prominently somehow forgot to look at this issue? Or concluded it was a violation and then signed off the practice as part of the business model? Or that the IRS hasn't noticed them widely advertising this for years now?

If a tax adviser recommended reporting a wash sale for say an exchange of VWO with SCHE, that would actually provide useful information because I'd know to run out of his/her office as fast as I can. If one wants to "make up" various tax pseudo-violations and personally avoid them that's fine, but if you are going to provide advice on an advanced level investment forum you might want to keep fantasy tax wrongs to yourself.

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

Post by iceport » Fri Sep 14, 2018 12:09 am

Despite the confidence with which the above opinions are asserted, they are open to dispute. A previously posted legal review provides examples of other conclusions being drawn.

It seems to me that, if we follow the Bigfoot and the chupacabra analogy to its conclusion, some are arguing that the wash sale rule is non-existent for mutual fund and ETF investors, for all practical purposes. (Unlike with Bigfoot and the chupacabra, however, humans are capable of deciding — if they so choose — whether or not wash sales exist.) That may be true, either by intention or through lack of attention. But if you believe the wash sale rule does still exist, what, exactly, do you suppose its purpose to be? Why in the world would they make it against the law to sell an index fund at a loss, buy it back again immediately and still claim the loss? And if that's not allowed, why doesn't the same reasoning apply when repurchasing a different index fund that tracks the identical index?

Why was the wash sale rule written?

The most indisputable aspect of the preceding post is the utter contempt with which it was written. The forum encourages participation at all knowledge — and socioeconomic — levels.
"Discipline matters more than allocation.” ─William Bernstein

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