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Nervous about TLH

Posted: Mon Oct 07, 2019 12:08 pm
by david3213
I have about $10,000 that I can TLH from VTIAX. However, this means selling ~$400,000 of VTIAX and shifting it to a different investment. This is a very large sum of money and a significant fraction of my portfolio, but would help offset about $75,000 in net long term/short term gains from unwinding my portfolio after firing my AUM advisor. It would save me approximately $3,500 in taxes (state + federal). However, I'm very nervous about this since it's such a large sum (and my investor policy statement follows the core three-fund portfolio of VTIAX, VTSAX, VBTLX). A few questions:

1. Should I take the plunge? Any downsides?
2. Can I just exchange VTIAX for VFWAX? It will keep my money from "sitting out" the market.
3. Is VFWAX a good TLH partner?
4. I reinvested a few shares of VTIAX last week. To avoid wash sales, I can just sell these shares, right? They have a loss anyway.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 12:35 pm
by retired@50
Other contributors on this forum may be more helpful than I, but I'd suggest reading up on the tax loss harvesting / wash sale rules. I was under the impression that buying an "essentially identical" security to the one that was sold is a "no-no" in the wash sale rules. In theory, I agree with the strategy to take advantage of the rule, but with such a large move, I'd want to be certain I was in compliance with IRS regulations. You might be able to move the proceeds into something like the "Developed Markets Index" which excludes emerging markets. This might be seen as enough of a difference to pass the "essentially identical" test? Best of luck.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:07 pm
by david3213
retired@50 wrote:
Mon Oct 07, 2019 12:35 pm
Other contributors on this forum may be more helpful than I, but I'd suggest reading up on the tax loss harvesting / wash sale rules. I was under the impression that buying an "essentially identical" security to the one that was sold is a "no-no" in the wash sale rules. In theory, I agree with the strategy to take advantage of the rule, but with such a large move, I'd want to be certain I was in compliance with IRS regulations. You might be able to move the proceeds into something like the "Developed Markets Index" which excludes emerging markets. This might be seen as enough of a difference to pass the "essentially identical" test? Best of luck.
Agreed. It's not a particularly large TLH opportunity (when calculated as a percent of portfolio size), so I'm inclined to just skip it and keep life simple. Plus, the tax savings is likely smaller than the monthly fluctuations in total price of my VTIAX holdings. Perhaps if the market tanks even more it will make more sense.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:13 pm
by frcabot
The rule is substantially identical and I don’t think the two mutual funds you referenced would be considered substantially identical since they are different indexes.

Wash sales are self-reported and also reported by the brokerage (assuming you’re using the same brokerage) on a 1099-B. The transaction you’re describing would not be reported as a wash sale by any brokerage and the IRS has never ruled that selling an ETF/mutual fund tracking one index and buying another tracking a slightly different (but very similar) index would be a wash sale.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:32 pm
by magicrat
1. Hard to say. Personally I wouldn't TLH for $10k / $400k, but if you are able to offset short-term gains then it becomes more attractive.
2. Yes
3. Yes, VFWAX is an excellent TLH partner for VTIAX. You would be fine holding this forever (you can always TLH back into VTIAX, and/or direct dividends and future contributions to VTIAX).
4. As long as those are your only replacement shares, then yes.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:35 pm
by magicrat
retired@50 wrote:
Mon Oct 07, 2019 12:35 pm
but with such a large move, I'd want to be certain I was in compliance with IRS regulations.
One should aim to understand the rules regardless of transaction size. Also note there is no "compliance" issue with a wash sale (other than filing accurate taxes and maintaining an accurate basis for related shares).

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:36 pm
by Whakamole
You could also buy IXUS, if you were OK with owning a BlackRock ETF. It's closer to VTIAX since it holds small caps, but still tracks a different index.

I did a VTIAX->VFWAX->IXUS->VTIAX trip a few years ago during a prolonged bad market for international, no issues when filing this.

EDIT: sorry, IXUS.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:40 pm
by lostdog
Whakamole wrote:
Mon Oct 07, 2019 1:36 pm
You could also buy ITOT, if you were OK with owning a BlackRock ETF. It's closer to VTIAX since it holds small caps, but still tracks a different index.

I did a VTIAX->VFWAX->ITOT->VTIAX trip a few years ago during a prolonged bad market for international, no issues when filing this.

ITOT is the US market. Do you mean IXUS?

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:45 pm
by Whakamole
lostdog wrote:
Mon Oct 07, 2019 1:40 pm
ITOT is the US market. Do you mean IXUS?
Yes, fixed. :oops:

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:50 pm
by simplesimon
david3213 wrote:
Mon Oct 07, 2019 1:07 pm
Agreed. It's not a particularly large TLH opportunity (when calculated as a percent of portfolio size), so I'm inclined to just skip it and keep life simple. Plus, the tax savings is likely smaller than the monthly fluctuations in total price of my VTIAX holdings. Perhaps if the market tanks even more it will make more sense.
If you TLH today and then the market tanks further you'll have a second TLH opportunity. If the market turns around, you locked in the TLH and will benefit.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 1:57 pm
by student
I would not worry that VTIAX and VFWAX are substantially identical. My reasoning are (1) Why would Vanguard offer two substantially identical funds? (2) One holds more than twice the number of stocks of the other one. So I think they can be TLH partners.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 2:00 pm
by frcabot
It’s not even clear that 2 ETFs from different providers tracking the EXACT SAME INDEX (example: Vanguard 500 Fund, Schwab 500 Fund) would be considered substantially identical—although there’s a good argument that they would be, AFAIK the IRS has never said so. There’s also a pretty good argument that they wouldn’t be (different expense ratios, different tracking errors, etc.)

Although the rule says “substantially identical,” the way the IRS has enforced the rule has been to only target purchases and sales of “exactly identical” securities.

The wash sale rule predates mutual funds, let alone ETFs. For as long as mutual funds have been around, the IRS has NEVER to my knowledge, not even once, tried to apply to wash sale rule to different mutual funds. In fact, just about the only guidance the IRS has ever issued with respect to mutual funds and wash sale rule is that “ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.” Mutual funds have been around for a long, long, time.

I guess this leaves to the imagination what a “not ordinary” situation would be...

A murkier case is where you use TLH to buy and sell Berkshire Hathaway class A or B shares. Or different classes of Google shares. Are those substantially identical securities? Not clear either—after all, they have different voting rights. A brokerage firm would NOT report those transactions as wash sales (they have different CUSIP numbers).

All this to say that you’re probably pretty safe.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 2:01 pm
by sharukh
Whakamole wrote:
Mon Oct 07, 2019 1:36 pm
You could also buy IXUS, if you were OK with owning a BlackRock ETF. It's closer to VTIAX since it holds small caps, but still tracks a different index.

I did a VTIAX->VFWAX->IXUS->VTIAX trip a few years ago during a prolonged bad market for international, no issues when filing this.

EDIT: sorry, IXUS.
Hi,
How did you TLH between etf and mutual fund?

Sell etf at end of day close to market close?

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 3:16 pm
by rkhusky
You could also use an 90/10 mix of VFWAX/VFSAX if you want to keep the small caps (according to https://www.bogleheads.org/wiki/Approxi ... ock_market).

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 3:30 pm
by david3213
Thanks for all the great advice! Would an "exchange" be the way to go to ensure my money remains in the market without a gap of several days while waiting for the trade to settle? I know some people recommend Fidelity funds as good TLH partners, but my money would be out of the market for about one day which (in my mind) is risky.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 3:36 pm
by livesoft
I would do the exchange. Actually, today was an excellent day to do the exchange, but the next excellent day will be tomorrow. I don't think you have anything to worry about.

And it will be a great learning experience for you. You are also likely to be able to exchange back to VTIAX in a month or so when your new shares of VFWAX lose money.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 3:54 pm
by frcabot
david3213 wrote:
Mon Oct 07, 2019 3:30 pm
Thanks for all the great advice! Would an "exchange" be the way to go to ensure my money remains in the market without a gap of several days while waiting for the trade to settle? I know some people recommend Fidelity funds as good TLH partners, but my money would be out of the market for about one day which (in my mind) is risky.
Yeah, exchange is best way to do it if you don’t want to be out of the market for a day.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 4:17 pm
by Stinky
simplesimon wrote:
Mon Oct 07, 2019 1:50 pm

If you TLH today and then the market tanks further you'll have a second TLH opportunity. If the market turns around, you locked in the TLH and will benefit.
Sounds like a win-win to me. The tax loss today isn’t particularly large, but you will be saving taxes with future possibilities if market slides more.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 4:19 pm
by frcabot
Personally I hope the markets tank forever so I have infinite TLH opportunities!

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 4:43 pm
by david3213
livesoft wrote:
Mon Oct 07, 2019 3:36 pm
I would do the exchange. Actually, today was an excellent day to do the exchange, but the next excellent day will be tomorrow. I don't think you have anything to worry about.

And it will be a great learning experience for you. You are also likely to be able to exchange back to VTIAX in a month or so when your new shares of VFWAX lose money.
True! It's just a gigantic sum of money to use as a learning opportunity!

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 4:45 pm
by david3213
frcabot wrote:
Mon Oct 07, 2019 4:19 pm
Personally I hope the markets tank forever so I have infinite TLH opportunities!
I am personally hoping this, but only so I can finally unwind a TLH my AUM advisor performed during the stock market "crash" last December. He moved me into a new fund (EKJYX) with an ER of 0.82% and turnover of 60%. Since all the gains are currently short-term, I have to wait it out before selling.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 5:09 pm
by Stinky
frcabot wrote:
Mon Oct 07, 2019 4:19 pm
Personally I hope the markets tank forever so I have infinite TLH opportunities!
I assume that you mean “forever”, and not the literal forever.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 5:11 pm
by frcabot
Stinky wrote:
Mon Oct 07, 2019 5:09 pm
frcabot wrote:
Mon Oct 07, 2019 4:19 pm
Personally I hope the markets tank forever so I have infinite TLH opportunities!
I assume that you mean “forever”, and not the literal forever.
What’s the difference?

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 5:34 pm
by Stinky
frcabot wrote:
Mon Oct 07, 2019 5:11 pm
Stinky wrote:
Mon Oct 07, 2019 5:09 pm
frcabot wrote:
Mon Oct 07, 2019 4:19 pm
Personally I hope the markets tank forever so I have infinite TLH opportunities!
I assume that you mean “forever”, and not the literal forever.
What’s the difference?
Having the markets tank forever would mean that stocks would decline to zero.

I think that would be a problem. :D

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 5:40 pm
by retiringwhen
you sound like you did your homework, your plan looks reasonable and you are doing for solid reasons, money saving reasons. I don't see a downside, except your nerves.

I did 2 and half TLH round trips last year as the market went down in the 4th quarter. The first was nerve wracking but it got easier even as the size of the losses got bigger!

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 6:00 pm
by frcabot
Stinky wrote:
Mon Oct 07, 2019 5:34 pm
frcabot wrote:
Mon Oct 07, 2019 5:11 pm
Stinky wrote:
Mon Oct 07, 2019 5:09 pm
frcabot wrote:
Mon Oct 07, 2019 4:19 pm
Personally I hope the markets tank forever so I have infinite TLH opportunities!
I assume that you mean “forever”, and not the literal forever.
What’s the difference?
Having the markets tank forever would mean that stocks would decline to zero.

I think that would be a problem. :D
Not if 100% of your portfolio is SPXU like me! I get all my investing advice from Yahoo! Finance comments. The apocalypse is coming.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 6:11 pm
by Wiggums
Stinky wrote:
Mon Oct 07, 2019 5:09 pm
frcabot wrote:
Mon Oct 07, 2019 4:19 pm
Personally I hope the markets tank forever so I have infinite TLH opportunities!
I assume that you mean “forever”, and not the literal forever.
:-)

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 6:15 pm
by international001
Out of curiosity?

If you use the same broker for all transactions, and they don't mark it as a Wash rule, can the IRS come back later and give you trouble?

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 6:18 pm
by frcabot
international001 wrote:
Mon Oct 07, 2019 6:15 pm
Out of curiosity?

If you use the same broker for all transactions, and they don't mark it as a Wash rule, can the IRS come back later and give you trouble?
Yes, but it’s EXTREMELY unlikely. A couple examples where it has happened (very large transactions) are convertible securities (eg selling a stock then buying a convertible preferred stock or convertible bond of the same underlying company and then converting). This wouldn’t register as a wash sale on a 1099-B but it could in fact be a wash sale (based on a whole set of factors including voting rights laid out in the CFR and various revenue rulings). Another example involves options. Again though, we’re talking extremely large purchase/sales and an audit. Like I said, there’s no published case of this happening with mutual funds or ETFs as described above.

Some distinct bonds have been held to be substantially identical. Example revenue ruling 1958-211, US Treasury bonds identical except maturing 6 months apart held to be SI. Would not register as wash sale on 1099-B. Conversely in RR 1958-210, 2 similar treasury bonds maturing 3 months apart but with slightly different redemption features held not to be SI. It can get very complicated and nuanced.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 6:20 pm
by Wiggums
I would agree that it’s possible during an audit, but not likely.

All sales of investments such as stocks or other securities are reported on IRS Form 8949, Sales and Other Dispositions of Capital Assets, and then inputted on a Schedule D (Form 1040), Capital Gains and Losses.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 8:07 pm
by grabiner
international001 wrote:
Mon Oct 07, 2019 6:15 pm
Out of curiosity?

If you use the same broker for all transactions, and they don't mark it as a Wash rule, can the IRS come back later and give you trouble?
Yes. The broker is only required to report wash sales on identical securities in the same account. If you sell in your taxable account and buy in your IRA, or sell and your spouse buys, or sell in your Vanguard account and buy in your Fidelity account, these are all established cases of wash sales. And the broker is not required to interpret "substantially identical", even when there is clear IRS guidance, such as selling one share class and buying another, or selling a stock and buying a deep-in-the-money call option.

Re: Nervous about TLH

Posted: Mon Oct 07, 2019 8:28 pm
by frcabot
grabiner wrote:
Mon Oct 07, 2019 8:07 pm
international001 wrote:
Mon Oct 07, 2019 6:15 pm
Out of curiosity?

If you use the same broker for all transactions, and they don't mark it as a Wash rule, can the IRS come back later and give you trouble?
Yes. The broker is only required to report wash sales on identical securities in the same account. If you sell in your taxable account and buy in your IRA, or sell and your spouse buys, or sell in your Vanguard account and buy in your Fidelity account, these are all established cases of wash sales. And the broker is not required to interpret "substantially identical", even when there is clear IRS guidance, such as selling one share class and buying another, or selling a stock and buying a deep-in-the-money call option.
Theoretically buying 2 different share classes would not be SI if they have different voting rights. See RR 77-201 (voting rights considered in determining whether a security is SI). Hard to say for sure though. I wouldn’t risk it.

Re: Nervous about TLH

Posted: Tue Oct 08, 2019 9:33 am
by goingup
david3213 wrote:
Mon Oct 07, 2019 12:08 pm
I have about $10,000 that I can TLH from VTIAX. However, this means selling ~$400,000 of VTIAX and shifting it to a different investment. This is a very large sum of money and a significant fraction of my portfolio, but would help offset about $75,000 in net long term/short term gains from unwinding my portfolio after firing my AUM advisor. It would save me approximately $3,500 in taxes (state + federal). However, I'm very nervous about this since it's such a large sum (and my investor policy statement follows the core three-fund portfolio of VTIAX, VTSAX, VBTLX). A few questions:

1. Should I take the plunge? Any downsides?
2. Can I just exchange VTIAX for VFWAX? It will keep my money from "sitting out" the market.
3. Is VFWAX a good TLH partner?
4. I reinvested a few shares of VTIAX last week. To avoid wash sales, I can just sell these shares, right? They have a loss anyway.
I see no downsides at all. Yes, make an exchange between VTIAX and VFWAX. These are fine TLH partners. I've done this several times without worry. I like it best when I can exchange all shares just to keep things simpler.

The nice thing about exchanging funds is that you're never out of the market. You're maintaining your position.

I usually pick a down day in the market. I've gone into the account and done a practice run (which I cancel out of) to make sure I understand what I'm doing. Then I wait until the last 30 minutes before the market closes to transact.

I wouldn't be concerned about the size of your holding. That shouldn't be an issue. Some previous poster said he wouldn't harvest for $10K, presumably because it isn't much of a dip on a $400K holding. But if the loss is valuable to you, I would proceed. As mentioned, if the market pulls back further, you can harvest again and make it a "round trip" back into your original position 31 days hence.

If you're still wary you can call Vanguard to discuss and get some reassurance. After you do it once you'll see that it's straightforward. :beer

Re: Nervous about TLH

Posted: Tue Oct 08, 2019 3:02 pm
by international001
frcabot wrote:
Mon Oct 07, 2019 8:28 pm
grabiner wrote:
Mon Oct 07, 2019 8:07 pm
international001 wrote:
Mon Oct 07, 2019 6:15 pm
Out of curiosity?

If you use the same broker for all transactions, and they don't mark it as a Wash rule, can the IRS come back later and give you trouble?
Yes. The broker is only required to report wash sales on identical securities in the same account. If you sell in your taxable account and buy in your IRA, or sell and your spouse buys, or sell in your Vanguard account and buy in your Fidelity account, these are all established cases of wash sales. And the broker is not required to interpret "substantially identical", even when there is clear IRS guidance, such as selling one share class and buying another, or selling a stock and buying a deep-in-the-money call option.
Theoretically buying 2 different share classes would not be SI if they have different voting rights. See RR 77-201 (voting rights considered in determining whether a security is SI). Hard to say for sure though. I wouldn’t risk it.
So if you buy/sell in 2 different accounts of the same broker, broker will mark it as a Wash Sale
If you buy/sell equivalent admiral fund/ETF in the same broker , broker will not mark it as a Wash Sale?

Any experiences with Vanguard?