Has anyone been contacted by the IRS regarding TLH?

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Raybo
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Has anyone been contacted by the IRS regarding TLH?

Post by Raybo » Sun Jan 15, 2012 11:05 am

I've never had the IRS contact me about any of the tax loss harvesting I've done.

Has anyone on the board been asked by the IRS for more information or been told that their TLH was being disallowed?

It seems like the IRS would have to have a great deal of information about mutual funds to determine, on their own, that someone bought another fund that was "substantially" the same as one they'd sold.

Ray
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sscritic
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by sscritic » Sun Jan 15, 2012 11:15 am

Raybo wrote: It seems like the IRS would have to have a great deal of information about mutual funds to determine, on their own, that someone bought another fund that was "substantially" the same as one they'd sold.
Purchases are not reported to the IRS. Even under the new rules, the purchase won't be reported until the matching sale.

I sold A in 2010 and bought B. I sell B in 2012. When does the IRS learn that I bought B in 2010? Are they going to connect it to the sale of a completely different fund, A? They have other things to worry about.

stan1
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by stan1 » Sun Jan 15, 2012 11:33 am

The IRS is much more concerned about under-reporting of capital gains.
That's why reporting is now required.

Example:
John buys 1000 shares of XYZ in 2008 for $50/share. (his only holding of XYZ)
He sells the 1000 shares in 2011 for $100/share for a gain of $50K.

When he goes to do his taxes, he calculates a $50K capital gain, but cringes at paying the tax so he reports the basis as $85K instead of $50K (paying tax on a $15K gain instead of a $50K gain). He doesn't get too greedy by saying the gain is $0, or a loss. He figures that the odds of getting caught are low, and he can blame it on sloppy record keeping and correct it if he does get caught.

Making this much harder is where the money is for the IRS. Outside of this board there are probably very few people who even understand the "substantially identical" discussions we have.

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Default User BR » Sun Jan 15, 2012 1:27 pm

Raybo wrote:Has anyone on the board been asked by the IRS for more information or been told that their TLH was being disallowed?
No one that I've seen has turned up a case where the IRS tried to apply the "substantially identical" rule anywhere in the nation, let alone this forum. That doesn't mean that there aren't some that weren't where they can be found, but in general it doesn't seem like it's currently in the IRS sites.


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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Alan S. » Sun Jan 15, 2012 2:20 pm

The IRS is not concerned with totally legal TLH, but when it comes to wash sales, in the future sniffing out wash sales will be the responsibility of the brokers under the new basis reporting requirements.
The IRS had no prior effective way to detect wash sales, and there really was no cumulative tax gap resulting from that because the frequent traders that have wash sales are going to sell the replacement shares very soon anyway. Basis reporting will also eliminate many incorrect cost basis figures caused by the intentional transferring to new brokers.

The benefit of accelerating losses is also limited by the modest 3,000 cap loss limit which has not been adjusted for inflation for many years.

In addition, effective TLH in the last couple years may come back to haunt some taxpayers with a lower cost basis as a result and cap gains rates set to rise in 2013.

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Kevin M » Sun Jan 15, 2012 2:33 pm

Alan S. wrote:The IRS is not concerned with totally legal TLH, but when it comes to wash sales, in the future sniffing out wash sales will be the responsibility of the brokers under the new basis reporting requirements.
Vanguard has stated that they only report wash sales for the same fund, not similar funds, and IIRC, they won't even report a wash sale if you buy the same fund in an IRA account held at Vanguard (after selling for a loss in taxable). So, I wonder if brokers will really have any impact on the substantially identical issue.
Alan S. wrote: The benefit of accelerating losses is also limited by the modest 3,000 cap loss limit which has not been adjusted for inflation for many years.
Good point, but another benefit is using losses carried forward to offset future capital gains.
Alan S. wrote:In addition, effective TLH in the last couple years may come back to haunt some taxpayers with a lower cost basis as a result and cap gains rates set to rise in 2013.
Another good point, but again, using carryover losses to offset the gains will negate this effect to whatever extent we've generated large carryover losses through extensive TLH.

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retiredjg
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by retiredjg » Sun Jan 15, 2012 3:22 pm

This is the first I've heard of new reporting requirements. Can someone give a summary or point to a source that is easy to understand?

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by ejvyas » Sun Jan 15, 2012 3:28 pm

Its very difficult for IRS to track of esp if your taxable and 401k/IRA/HSA custodians are different and your wash sale is across these accounts. Even more difficult if its between you and your spouse and you file jointly.

I feel IRS depends to some degree on general public to declare all income and file all forms appropriately. At this moment, this is one such area.

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by dbr » Sun Jan 15, 2012 3:29 pm

retiredjg wrote:This is the first I've heard of new reporting requirements. Can someone give a summary or point to a source that is easy to understand?
For stocks and ETF's purchased after 1/1/11 and mutual funds purchased after 1/1/12, when sold, brokers will report both the purchase amounts and dates and the sales amounts and dates to the IRS and to you. To do this the broker will have to use some choice of the various methods of specifying what shares were sold at the sale. There are other changes, such as that the rules for average basis will not include positions held everywhere, but only positions held at that broker; otherwise, the broker could not know how to compute the average basis. Etc., etc.

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by sscritic » Sun Jan 15, 2012 3:31 pm

retiredjg wrote:This is the first I've heard of new reporting requirements. Can someone give a summary or point to a source that is easy to understand?
They are talking about Vanguard asking you what basis you are going to use on covered shares. The IRS will be getting more information about the mutual fund shares that you buy in 2012 when you later sell them than they did in the past. The requirement is on brokers to report more information.

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Kevin M » Sun Jan 15, 2012 3:38 pm

retiredjg wrote:This is the first I've heard of new reporting requirements. Can someone give a summary or point to a source that is easy to understand?
You could start here:
https://personal.vanguard.com/us/insigh ... s-01032012
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by retiredjg » Sun Jan 15, 2012 4:20 pm

Thanks! I knew we now have to choose a reporting method, but didn't realize it was part of a bigger picture. This should be interesting.

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mas
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by mas » Sun Jan 15, 2012 7:58 pm

My best guess is that it is more likely to be scrutinized during an audit, than before. As others have pointed out, the IRS doesn't collect enough info on a normal tax return to police most wash sales reporting.

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Daffy
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Daffy » Mon Jan 16, 2012 12:14 am

If no one is monitoring wash sales, and there's no documented case of anyone ever getting busted by the IRS for a wash sale, then why does the rule exist in the first place? What exactly is the point of this rule if there's no way to police it?

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by stan1 » Mon Jan 16, 2012 12:45 am

I'm sure the IRS has caught people for wash sales of the same security.
(e.g. sold IBM for a loss, then immediately rebought IBM)

The area of uncertainty is whether a Vanguard S&P 500 Index ETF is substantially identical to a SPDR S&P 500 ETF or an iShares S&P 500 ETF.

Some people feel that because these 3 ETFs are invested in the same index that they are substantially identical. Others believe they are not substantially identical because they have a different ticker symbol, a different CUSIP number (unique identifier), and different governance/management.

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Default User BR » Mon Jan 16, 2012 2:44 am

Daffy wrote:If no one is monitoring wash sales, and there's no documented case of anyone ever getting busted by the IRS for a wash sale, then why does the rule exist in the first place? What exactly is the point of this rule if there's no way to police it?
It probably sounded good to someone in Congress, without thinking through the practical application.


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Re: Has anyone been contacted by the IRS regarding TLH?

Post by coinflip » Mon Jan 16, 2012 8:20 am

This will be my first year claiming capital losses. Should they show up on my 1099-DIV, or do I just calculate them myself?

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by Wagnerjb » Mon Jan 16, 2012 9:00 am

Alan S. wrote:In addition, effective TLH in the last couple years may come back to haunt some taxpayers with a lower cost basis as a result and cap gains rates set to rise in 2013.
I understand the point, but wouldn't you need to be pretty incompetent and pretty unlucky to lose money tax loss harvesting? These are some of the scenarios I could see:

1) You TLH today, using the $3,000 against ordinary income at 28%. In the distant future you sell the replacement shares, paying something over 15% (presumably 20%). You win.

2) You TLH today, using the loss against capital gains that would have been taxed at 15%. In the distant future you sell the replacement shares, paying 15%. You win (due to time value of money).

3) You TLH today using $3,000 of the loss against ordinary income and carrying the remainder forward. In the near future you realize capital gains from other investments, using the losses to offset the capital gains taxed at 20%. In the distant future you sell the replacement shares, paying 20% CG tax. You win.


The only way to lose would be to TLH today and use the entire loss against current year capital gains (which would otherwise be taxed at 15%). You then turn around and sell your replacement shares in the near term, but after the CG rate has increased. Who does this? And where is their advisor? A Boglehead with passive investments won't have many capital gains to begin with. And he certainly won't have them year after year. And he won't be itching to sell the replacement shares as a passive investor.

I see your point, but let's hope this doesn't happen to anybody around here :D

Best wishes.
Andy

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by sscritic » Mon Jan 16, 2012 9:12 am

Daffy wrote:If no one is monitoring wash sales, and there's no documented case of anyone ever getting busted by the IRS for a wash sale, then why does the rule exist in the first place? What exactly is the point of this rule if there's no way to police it?
Where are you getting your facts? If you sell TSM at a loss and then buy it back 20 days later, Vanguard knows, Vanguard tells you, and Vanguard tells the IRS. You are busted. It happens all the time. But then, that wasn't the question in this thread. The thread is not about getting busted for a wash sale; the thread is about getting busted for a wash sale on the basis of "substantially identical" replacement shares. Read the word "substantially" in the original post (it's even in quotes so you won't miss it).

As others have mentioned, you could be audited for another reason, and as part of that audit be asked to explain your purchase of convertible shares of XXX two days after selling the common shares of XXX and claiming a loss. That happens too, just not as frequently as Vanguard busting you for buying actually, truly, identical shares which are clearly much more that just "substantially" identical.
Convertible securities and common stock of the same corporation can also fall into this category if the market and conversion prices are similar.
http://www.investopedia.com/terms/s/sub ... z1jd93ceFh

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Re: Has anyone been contacted by the IRS regarding TLH?

Post by JW-Retired » Mon Jan 16, 2012 9:13 am

This will be my first year claiming capital losses. Should they show up on my 1099-DIV, or do I just calculate them myself?
Usually it will be on the 1099. The sale price will definitely show up. If the cost basis of the asset was known to the broker/fund company that will show up too. If not it won't. I have often transferred assets from one fund company to another and found the cost data doesn't get through. So keep records yourself.
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by archbish99 » Mon Jan 16, 2012 11:03 am

stan1 wrote:The IRS is much more concerned about under-reporting of capital gains.
That's why reporting is now required.

Example:
John buys 1000 shares of XYZ in 2008 for $50/share. (his only holding of XYZ)
He sells the 1000 shares in 2011 for $100/share for a gain of $50K.

When he goes to do his taxes, he calculates a $50K capital gain, but cringes at paying the tax so he reports the basis as $85K instead of $50K (paying tax on a $15K gain instead of a $50K gain). He doesn't get too greedy by saying the gain is $0, or a loss. He figures that the odds of getting caught are low, and he can blame it on sloppy record keeping and correct it if he does get caught.

Making this much harder is where the money is for the IRS. Outside of this board there are probably very few people who even understand the "substantially identical" discussions we have.
What makes me nervous are the situations where the basis really is different than what the broker reported. I noticed that my 1099-B reflects the disallowed wash sale on one transaction, but doesn't reflect the increased basis that lended to the replacement security. Or the fact that the 1099-B shows the purchase price for my ESPP shares as being the discounted price, when the discount is already reflected on my W-2 as income.

We started working on TurboTax yesterday, and having to check the "I need to correct this basis" box over and over makes me a little nervous. :?
I'm not a financial advisor, I just play one on the Internet.

sscritic
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Re: Has anyone been contacted by the IRS regarding TLH?

Post by sscritic » Mon Jan 16, 2012 11:15 am

archbish99 wrote: What makes me nervous are the situations where the basis really is different than what the broker reported. I noticed that my 1099-B reflects the disallowed wash sale on one transaction, but doesn't reflect the increased basis that lended to the replacement security. Or the fact that the 1099-B shows the purchase price for my ESPP shares as being the discounted price, when the discount is already reflected on my W-2 as income.

We started working on TurboTax yesterday, and having to check the "I need to correct this basis" box over and over makes me a little nervous. :?
I may be completely wrong about this in general, but in my experience the truth and documentation work pretty well. I have received letters from the IRS challenging my returns three times:

1) I left a sale off my Schedule D completely, so the IRS assumed a basis of zero. I wrote back and said, my bad, the proceeds reported by the broker are correct, but my basis was $X, my tax should be increased by $Y, not the figure you gave, and I will gladly pay what I owe. There was no problem.

2) I filed married separate having lived apart the whole year in a community property state. There are special rules for that and a worksheet that needs to be filled out, a copy of which I included with my return - I don't know if that was really required. The items on the 1099 from my pension had to be split according to the community interests, but the IRS only saw my name and social on the whole thing. I wrote back to explain that I was following their rules and included an expanded version of the worksheet with a further explanation. They wrote back and said thank you.

3) I can't even remember what this one was, but it was closer to 2 than to 1. In the end, the IRS and I hugged and made up.

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