How much effort would you exert to avoid a wash sale

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Ken Reckers
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Joined: Fri Apr 20, 2007 9:52 am

How much effort would you exert to avoid a wash sale

Post by Ken Reckers » Tue Mar 02, 2010 12:04 pm

I have a practical question about wash sales, concerning how much trouble would you actually go to, to save a little tax. I doubt anyone will read this whole posting, but thanks in advance to anyone who tries.

I own 600 shares of Fund W in a taxable account.

#sh price cost date
200 20.00 4000 1996
200 28.50 5700 2001
200 32.00 6400 2007

I want to sell 200 sh, now at 30.00/sh, with proceeds 6000.

If I use FIFO, I have a 2000 gain.
If I sell the shares purchased in 2001, I have a 300 gain.
If I sell the shares purchased in 2007, I have a 400 loss.

I anticipate a dividend later this month. I want to sell now, not wait until May.

My immediate family also owns holdings of Fund W in four other accounts: Roth, TIRA, and 2 UTMA's. All are set up for automatic reinvestment of dividends.

Option 1: Sell the shares purchased in 2001 for a 300 gain. Then there is no wash sale since I have a gain. I pay tax on the 300 gain.

Option 2: Sell the shares purchased in 2007 for a 400 loss. To be able to claim the loss and avoid a wash sale when the dividends are reinvested, I change the automatic reinvestment option.
In the taxable acct, I change so that dividends are invested in Fund T.
For the Roth, I change so that dividends are invested in Fund P.
For each of the UTMA's, I change so that dividends are invested in Fund T.
For the TIRA, Fund W is the only fund, so I open a new Fund B in the same TIRA using $3K from Fund W and change so that dividends from Fund W are invested in Fund B (or instead of Fund B, open Fund S which has a min balance of $1K).
Then sometime in April, I change all the dividend elections back to the way they used to be.

Option 3: Use Mr. Peabody's Way-Back machine and sell my shares in the middle of February.

I really have no idea what other people do (and by "people," I mean people who do try to follow the wash sale rules). So I'm asking, would anyone say Option 2 isn't worth it, just do Option 1 and pay the tax? Would anyone say Option 2 is hardly any trouble, so do Option 2? My natural inclination is to do Option 2.

The dollar amounts are approximately correct, fed bracket is 15, and state is 3.

The dates are not correct, and I have lumped multiple lots together. Option 1 may be trickier than I think, since it is possible that the sale price will drop before my letter of instruction is received, potentially giving a loss that Option 1 was supposed to avoid.

Many thanks for any comments.

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AshKK
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Post by AshKK » Tue Mar 02, 2010 12:25 pm

Hi Ken,

The main drawback of Option 2 is the hassle - and at best it saves you say, 10-20% of 700$, or in the neighborhood of 100$.

Why not wait until May (or 30 days have passed since the dividends) and re-evaluate your situation? You have waited at least 13 years, and continue to hold this fund, so why not another couple of months?

But if you can't wait, I would do Option 2.
Ash | | The 82nd Boglehead.

Ken Reckers
Posts: 42
Joined: Fri Apr 20, 2007 9:52 am

Post by Ken Reckers » Wed Mar 03, 2010 1:00 am

Thanks for your input, Ash. I did Option 2. It was very easy to change the reinvestment options and even open the necessary new accounts. The only snag was trying to direct dividends from Fund W into a closed account, so I opened a STAR fund to receive the dividends (this one was within a Roth). I spent more time writing the original post than in carrying it out!

However, the one big exception to simplicity was specifying the shares. The example in my post was oversimplified. I really sold from 30 different lots. Now I see why people use MM funds to collect distributions. Maybe I'd try that, if I sold shares more often than every seven years. :)

Thanks.

Jack
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Joined: Tue Feb 27, 2007 2:24 am

Post by Jack » Wed Mar 03, 2010 1:44 am

You could sell 114 shares from the lot in 2001 and 86 shares from the lot in 2007 for a net gain/loss of zero. No taxes and no wash sale to worry about.

On your schedule D you show the date of purchase as "Various" and the cost basis as a total of $6000. Since it is a single sale and all shares are long term, I don't think you have to separately list part of the shares as a loss and part as a gain. You just show the combined basis which exactly equals the sales proceeds resulting in no gain or loss.

sscritic
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Re: How much effort would you exert to avoid a wash sale

Post by sscritic » Wed Mar 03, 2010 8:21 am

Ken Reckers wrote: I own 600 shares of Fund W in a taxable account.

I anticipate a dividend later this month. I want to sell now, not wait until May.

My immediate family also owns holdings of Fund W in four other accounts: Roth, TIRA, and 2 UTMA's. All are set up for automatic reinvestment of dividends.
1) How many shares do you and immediate family hold in total as compared to the 200 you are sellling? (This isn't really relevant, but gives some perspective)
2) How many shares will be purchased with the reinvested dividends from all the shares you hold? (This is relevant.)

If you hold a total of 1000 shares which will pay a dividend equivalent to 1%, i.e., buy 10 new shares, only 10 of your 200 shares sold will be "washed." Forgetting that they came from dividends, you will have sold 200 shares and bought back 10 "replacement" shares. The 190 shares are not washed and you can take a loss. The 10 shares are washed, and you increase the basis on those 10 replacement shares in your taxable account by the loss not taken. Example: you sell at $30 and the dividend reinvestment goes through at $31. Your new basis is $33 for the newly purchased 10 replacement shares (new $31 + $2 for the loss you didn't take).

Since you are already keeping your lots separate, each with its own basis, this just adds one more lot. Go ahead and sell without messing with changing the reinvesting dividend options.

Note: if you have been reinvesting dividends, your last purchase wasn't in 2007 (or are only the other accounts using dividend reinvestment?).

P.S. Even if the reinvested dividends purchase 200 new shares and your whole sale will be a wash sale, you won't pay any tax (nor take a loss) on your sale, and your basis on those 200 new shares will be increased by the loss not taken.

TheEternalVortex
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Post by TheEternalVortex » Wed Mar 03, 2010 9:22 am

Wash sales are that bad in taxable accounts because you still benefit from the increased basis.

What's really bad is taking a wash sale in a tax-advantaged account, since you just lose it all completely. In that sense the dividends in your Roth and TIRA would disallow some of your loss but you wouldn't get any basis increase. That's kind of unfortunate.

But I think the best idea might have been to get close to $0 gain (preferring a very slight gain to a loss), just because it's simpler in terms of managing everything. You're only losing out on $400 of loss, which is around $100 you get to borrow until you actually sell the shares. Not a huge benefit.

Chuck
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Post by Chuck » Wed Mar 03, 2010 10:45 am

TheEternalVortex wrote:Wash sales are that bad in taxable accounts because you still benefit from the increased basis.
Presume you meant "aren't that bad" and I agree.

However I find the reporting ludicrously annoying, so I take all dividends as cash and reinvest manually. Automatic investments don't force me to automatically update my cost basis records so I forget until tax time and have to go back and try to remember what happened, but when I sit down at my computer to reinvest, I have my cost records right there and update them at the same time.

Ken Reckers
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Joined: Fri Apr 20, 2007 9:52 am

Post by Ken Reckers » Wed Mar 03, 2010 4:57 pm

You could sell 114 shares from the lot in 2001 and 86 shares from the lot in 2007 for a net gain/loss of zero. No taxes and no wash sale to worry about.

On your schedule D you show the date of purchase as "Various" and the cost basis as a total of $6000. Since it is a single sale and all shares are long term, I don't think you have to separately list part of the shares as a loss and part as a gain. You just show the combined basis which exactly equals the sales proceeds resulting in no gain or loss.
Thanks for the idea, but according to page 57 of Publication 550, this is not allowed. I could not deduct the loss from any shares that were replaced within 30 days, nor could I use such a loss to reduce the gain, even with identical securities sold on the same day.

If you hold a total of 1000 shares which will pay a dividend equivalent to 1%, i.e., buy 10 new shares, only 10 of your 200 shares sold will be "washed." Forgetting that they came from dividends, you will have sold 200 shares and bought back 10 "replacement" shares. The 190 shares are not washed and you can take a loss. The 10 shares are washed, and you increase the basis on those 10 replacement shares in your taxable account by the loss not taken. Example: you sell at $30 and the dividend reinvestment goes through at $31. Your new basis is $33 for the newly purchased 10 replacement shares (new $31 + $2 for the loss you didn't take).
Again I am very grateful for the suggestion. I have about 2500 shares in IRAs, so using your dividend equivalent of 1%, 25 of the 200 shares would be washed, and since they are in an IRA or Roth IRA, I can not add the disallowed loss to my basis (Pub 550, page 56). That loss would become permanently disallowed. Within taxable accounts, you are right that I would add to the basis.

Interestingly, since I went ahead and already carried out the change in reinvestment options, and I also looked at my inventory records which include some previously disallowed wash sales, I can tell you that it was much easier for me to change the reinvestment election than it is to account for multiple lots that include old wash sale bases. I sold those guys just to get rid of them!

Jack
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Post by Jack » Wed Mar 03, 2010 5:17 pm

Ken Reckers wrote:Thanks for the idea, but according to page 57 of Publication 550, this is not allowed. I could not deduct the loss from any shares that were replaced within 30 days, nor could I use such a loss to reduce the gain, even with identical securities sold on the same day.
Ah, right. Even though it may look like one sale on the Schedule D, you must match lot for lot when considering the wash sale rule. The method of mixing lots can be used to create a net zero gain, but you still have to comply with the wash sale rule.
Loss and gain on same day. Loss from a wash sale of one block of stock of security cannot be used to reduce any gains on identical blocks sold on the same day.

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