TLH right after dividend payments

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berg
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Joined: Mon Mar 18, 2013 8:43 pm

TLH right after dividend payments

Post by berg » Sat Dec 22, 2018 9:10 am

I was taking a look at my taxable account this morning and between VLCAX and VTIAX I have about $26k in losses (lucky me!). Dividends were paid out yesterday across my taxable and roth accounts for about $3k.

Do I understand correctly that if I TLH the $26k, the only impact of the $3k is that it becomes a wash sale and so my reported loss for tax purposes gets reduced from $26k to $23k? Other than reporting to the IRS is there anything I'm missing?

I'm already sitting on about $13k in carryover losses and $6k in losses from TLH I did in October this year. So even with the dividend wash sale, I'll be sitting on $42k in losses, which should last me quite some time...

Anything else to consider before I do the exchange?

Longdog
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Location: Philadelphia

Re: TLH right after dividend payments

Post by Longdog » Sat Dec 22, 2018 9:27 am

berg wrote:
Sat Dec 22, 2018 9:10 am
I was taking a look at my taxable account this morning and between VLCAX and VTIAX I have about $26k in losses (lucky me!). Dividends were paid out yesterday across my taxable and roth accounts for about $3k.

Do I understand correctly that if I TLH the $26k, the only impact of the $3k is that it becomes a wash sale and so my reported loss for tax purposes gets reduced from $26k to $23k? Other than reporting to the IRS is there anything I'm missing?

I'm already sitting on about $13k in carryover losses and $6k in losses from TLH I did in October this year. So even with the dividend wash sale, I'll be sitting on $42k in losses, which should last me quite some time...

Anything else to consider before I do the exchange?
I'm sure others will chime in with additional comments, but I'll point out that the portion of the $3K that was in your Roth account will eliminate the benefit of the loss sale forever for that amount. So, if there was a $500 reinvested dividend in your Roth IRA, $500 of your loss will not be deductible and also will not increase the basis on securities that will eventually be sold. I'd recommend waiting until 31 days after the reinvestment to consider this maneuver - which will put it into next year. No harm in reducing next year's taxes, is there?
Steve

livesoft
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Re: TLH right after dividend payments

Post by livesoft » Sat Dec 22, 2018 9:31 am

Longdog is not quite correct because they wrote "$500 of your loss will not be deductible." That's not right. Determine the number of shares purchased in the Roth IRA with the reinvested dividend. The loss on that number of shares is washed and will be permanently disallowed. That number should be well under $500.

If you sell the shares purchased overnight in your taxable account, then the wash created by their purchase will be "undone" and you will not lose any deduction for that.

It is also possible that some of the shares that paid a dividend will not be held for 61 days since you bought them in October and you might sell them next week. If so, then any qualified part of the dividend will not meet a personal holding period required by the IRS and you will have to change that on your tax return.
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Longdog
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Re: TLH right after dividend payments

Post by Longdog » Sat Dec 22, 2018 10:59 am

livesoft wrote:
Sat Dec 22, 2018 9:31 am
Longdog is not quite correct because they wrote "$500 of your loss will not be deductible." That's not right. Determine the number of shares purchased in the Roth IRA with the reinvested dividend. The loss on that number of shares is washed and will be permanently disallowed. That number should be well under $500.
You’re right - I was trying to come up with a simplified explanation and simplified too much.
It is also possible that some of the shares that paid a dividend will not be held for 61 days since you bought them in October and you might sell them next week. If so, then any qualified part of the dividend will not meet a personal holding period required by the IRS and you will have to change that on your tax return.
I read recently at https://www.investopedia.com/articles/i ... idends.asp that the holding period to determine whether a dividend paid by a mutual fund is qualified is based on how long the mutual fund held the underlying shares, not how long the individual held the mutual fund shares. Here is the excerpt (emphasis added). Is it incorrect?
Qualified Dividends
Though most dividends are considered ordinary income, dividends considered "qualified" by the IRS are subject to the lower capital gains tax. The primary requirement for qualified dividends is the dividend-bearing stock must be held for a certain amount of time, called the holding period. When it comes to mutual fund dividends, the holding period refers to the length of time the fund has owned the stock, rather than how long you have owned shares in the fund.


For a mutual fund dividend to be considered qualified, it must be the result of a dividend payment by a stock in the fund's portfolio that meets the holding requirement outlined by the IRS. The fund must have owned the stock for at least 60 days within the 121-day period that starts 60 days prior to the ex-dividend date. This may sound confusing, but essentially it means the fund must own the stock for either 60 days before the ex-dividend date or a combination of days before and after that add up to at least 60 days. This regulation is in place to discourage funds and individual investors from buying and selling stocks just to get the dividend.
Steve

livesoft
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Re: TLH right after dividend payments

Post by livesoft » Sat Dec 22, 2018 11:15 am

Longdog wrote:
Sat Dec 22, 2018 10:59 am
Is it incorrect?
I think so. See also: http://www.vanguard.com/pdf/1099DIV_012016.pdf But I've been wrong before.
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HueyLD
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Re: TLH right after dividend payments

Post by HueyLD » Sat Dec 22, 2018 11:16 am

Steve,

It is better to get tax guidance from official sources instead of some website.

The IRS has a very good example in the Pub 550 as follows:

"Example 3.

You bought 10,000 shares of ABC Mutual Fund common stock on July 5, 2017. ABC Mutual Fund paid a cash dividend of 10 cents per share. The ex-dividend date was July 12, 2017. The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. However, you sold the 10,000 shares on August 8, 2017. You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days."

cryptormorf
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Re: TLH right after dividend payments

Post by cryptormorf » Sat Dec 22, 2018 11:19 am

livesoft wrote:
Sat Dec 22, 2018 9:31 am
If you sell the shares purchased overnight in your taxable account, then the wash created by their purchase will be "undone" and you will not lose any deduction for that.
I have a similar scenario with VTSAX (VANGUARD TOTAL STOCK MARKET). Shares were purchased via dividend re-investment on 2018 DEC 21, however the shares in that lot are not yet available to be sold or exchanged.

livesoft
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Re: TLH right after dividend payments

Post by livesoft » Sat Dec 22, 2018 11:23 am

cryptormorf wrote:
Sat Dec 22, 2018 11:19 am
livesoft wrote:
Sat Dec 22, 2018 9:31 am
If you sell the shares purchased overnight in your taxable account, then the wash created by their purchase will be "undone" and you will not lose any deduction for that.
I have a similar scenario with VTSAX (VANGUARD TOTAL STOCK MARKET). Shares were purchased via dividend re-investment on 2018 DEC 21, however the shares in that lot are not yet available to be sold or exchanged.
That's not your problem. That's just Vanguard not updating your account info in real time. Look again at 5:00 am on Monday morning before the market opens.
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cryptormorf
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Re: TLH right after dividend payments

Post by cryptormorf » Sat Dec 22, 2018 11:47 am

Thank you, livesoft.

As far as this caveat is concerned:
livesoft wrote:
Sat Dec 22, 2018 9:31 am
It is also possible that some of the shares that paid a dividend will not be held for 61 days since you bought them in October and you might sell them next week. If so, then any qualified part of the dividend will not meet a personal holding period required by the IRS and you will have to change that on your tax return.
Is that 61 days from the original trade date or the settlement date? Also, does this mean that Vanguard will not automatically calculate the portion of qualified dividends on the 1099-DIV?

livesoft
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Re: TLH right after dividend payments

Post by livesoft » Sat Dec 22, 2018 1:24 pm

It does mean that Vanguard doesn't calculate if you met your personal holding period or not. They say as much in their 1099-DIV brochure.

As for the 61-day rule, please read the IRS instructions, I don't want to give you the wrong information for your technical question.
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