Bond ETF vs Treas

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pomidoro
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Bond ETF vs Treas

Post by pomidoro »

I started to be concerned with bonds after I came across https://www.cnbc.com/2018/01/31/alan-gr ... bonds.html
Let's assume I believe mr. Greenspan and expecting both Stock ETF and Bond ETF go down. My question is - if I expect Bond ETF to go down (let's say for 3 years), what will be the safe asset? Can't I just sell my Bond ETF and start buying treasuries with 1-3 years maturity left - they can go up and down but anyway after 3 years I'll get both the principal and the coupon.
Sorry if this question sounds dumb but I'm a newbie in investing and trying to understand how the things work.
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Re: Bond ETF vs Treas

Post by Daryl »

You'll receive far better feedback if you post your portfolio using the format here.

Most of the folks you meet on this forum expect stocks and bonds to go up and down throughout their lifetime, and to occasionally experience terrifying volatility (up and down price movement). On average, we expect stocks to beat bonds, but that average hides a lot of randomness.

If you want to do everything that you can to reduce the risk that you'll lose money, your best bet is FDIC insured bank accounts (including CDs). The income received from these accounts is very low, and if this is your primary retirement strategy, you'll either need to increase your savings rate (as a percentage of your gross income) or work until you are 103 years old! As you shift from "safer" to "riskier" investments, you increase your chances of being able to retire at or before a traditional retirement age.
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Re: Bond ETF vs Treas

Post by pomidoro »

Thanks Deryl,

I completely agree with you regarding
expect stocks and bonds to go up and down throughout their lifetime
. My question is more theoretical one (that's why I posted it Theory section) and isn't really related to building my retirement portfolio.
Let me slightly rephrase it - let's say I want to buy a new car in 3 years (and I won't be retired so money are in taxable account) and I currently have 98% of the sum invested in VBMFX. We both agree that
stocks and bonds to go up and down throughout their lifetime
so what would be the best strategy in my case? I know about CD's, Treasuries and SVF but is there any other options (again, I just started my investment journey)?
dbr
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Re: Bond ETF vs Treas

Post by dbr »

pomidoro wrote: Fri Mar 02, 2018 7:42 am Thanks Deryl,

I completely agree with you regarding
expect stocks and bonds to go up and down throughout their lifetime
. My question is more theoretical one (that's why I posted it Theory section) and isn't really related to building my retirement portfolio.
Let me slightly rephrase it - let's say I want to buy a new car in 3 years (and I won't be retired so money are in taxable account) and I currently have 98% of the sum invested in VBMFX. We both agree that
stocks and bonds to go up and down throughout their lifetime
so what would be the best strategy in my case? I know about CD's, Treasuries and SVF but is there any other options (again, I just started my investment journey)?
There isn't a magic bullet out there that you are overlooking. For that amount of money for that length of time CDs are more than serviceable. Holding Treasuries to maturity is ok too but unless you already have a Treasury Direct account it would probably be simpler to just go to a bank and get a CD. Note Treasuries are exempt from state taxes, for what it is worth. Stable value funds are only available in 401k plans which probably would not help you. For all the difference it would make a high yield savings account would work too. It is actually possible to save money in I bonds, but there is an annual purchase limit, so for that you have to plan further ahead.
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Re: Bond ETF vs Treas

Post by mega317 »

Welcome to the forum. Not a dumb question at all.
dbr wrote: Fri Mar 02, 2018 8:28 am For all the difference it would make a high yield savings account would work too.
I might just quote this sentence in every "where should I put my savings for x purchase in a few years or less" thread. What is your new car fund, 30k? If you have the whole thing now and put it in a 3 year treasury you get about 2.3% minus fed tax (22% bracket?) so about 1500 bucks? A 1.5% savings account gets you $1000 minus state tax. Most people will be saving up gradually so the difference will be less. And that fact that you cited the ticker for the investor shares makes me think your fund is much smaller than 30k.

Different? Yeah. Does it matter? YMMV as the kids say. I would probably use the treasuries because I like playing around with stuff and $500 is not bad for the extra effort. Note you don't need a treasury direct account, you can buy them at your brokerage. Vanguard and some (most? all?) don't charge commission.
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Re: Bond ETF vs Treas

Post by scone »

If you need the money within a couple of years, and can’t stand fluctuation, then a CD is the simplest thing. If you can stand a little fluctuation, and if your state taxes dividends and interest, then you could use short duration Treasuries or maybe a 1 - 3 year duration Treasury bond fund. If you’re in a high tax bracket, don’t mind a little more credit risk, and your state has a short duration municipal bond fund, then that may be worth a look.
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
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Re: Bond ETF vs Treas

Post by pomidoro »

Thank you all for your answers!
I qualify for 30 no commission trades per month with Merrill so yes, I can avoid it.
What is your new car fund, 30k? If you have the whole thing now and put it in a 3 year treasury you get about 2.3% minus fed tax (22% bracket?) so about 1500 bucks? A 1.5% savings account gets you $1000 minus state tax
20k. I'm confused with '$1000 minus state tax' - looks like I have to pay fed+state for CD https://www.investopedia.com/ask/answer ... sit-cd.asp
scone wrote: Fri Mar 02, 2018 9:59 am and your state has a short duration municipal bond fund, then that may be worth a look.
Do only domestic state muni bonds qualify for tax exempt? I was under impression that tax exempt works even if I buy muni issued by any state.
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Re: Bond ETF vs Treas

Post by michaeljc70 »

If the bond ETF holds the bonds until maturity, they won't lose any principal either. The thing is, you will see the fluctuations in the bond ETF daily. If you actually went and looked up your treasuries, you would see they fluctuate daily too. It just isn't as obvious.
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Re: Bond ETF vs Treas

Post by Doc »

michaeljc70 wrote: Sat Mar 03, 2018 9:37 am If the bond ETF holds the bonds until maturity, they won't lose any principal either. The thing is, you will see the fluctuations in the bond ETF daily. If you actually went and looked up your treasuries, you would see they fluctuate daily too. It just isn't as obvious.
FWIW bond ETFs and funds typically do not hold to maturity but sell at 1 year or longer depending on their charter. Treasuries with less than one year to maturity are basically treated as cash.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.
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Re: Bond ETF vs Treas

Post by ETadvisor »

pomidoro wrote: Fri Mar 02, 2018 7:42 am Thanks Deryl,

I completely agree with you regarding
expect stocks and bonds to go up and down throughout their lifetime
. My question is more theoretical one (that's why I posted it Theory section) and isn't really related to building my retirement portfolio.
Let me slightly rephrase it - let's say I want to buy a new car in 3 years (and I won't be retired so money are in taxable account) and I currently have 98% of the sum invested in VBMFX. We both agree that
stocks and bonds to go up and down throughout their lifetime
so what would be the best strategy in my case? I know about CD's, Treasuries and SVF but is there any other options (again, I just started my investment journey)?
CD or High Yield Savings Account
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Re: Bond ETF vs Treas

Post by michaeljc70 »

Doc wrote: Sat Mar 03, 2018 10:46 am
michaeljc70 wrote: Sat Mar 03, 2018 9:37 am If the bond ETF holds the bonds until maturity, they won't lose any principal either. The thing is, you will see the fluctuations in the bond ETF daily. If you actually went and looked up your treasuries, you would see they fluctuate daily too. It just isn't as obvious.
FWIW bond ETFs and funds typically do not hold to maturity but sell at 1 year or longer depending on their charter. Treasuries with less than one year to maturity are basically treated as cash.
But dopes it matter? If you have a 10 year that yields 2.5% and rates go to 2.75%, the value of your bond is impaired. If you sell it before maturity, you get less. If you choose to hold it, the interest rate you earn is impaired (less than the current rate). You can sell it for less than par and buy a bond with a higher rate or keep it and the lower rate and get par at maturity. It is a wash. Once rates go up, there is a loss and holding a bond until maturity does nothing really. You lose on the interest earned or the bond value one way or the other.
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Re: Bond ETF vs Treas

Post by Doc »

michaeljc70 wrote: Sun Mar 04, 2018 7:52 am But dopes it matter? If you have a 10 year that yields 2.5% and rates go to 2.75%, the value of your bond is impaired. If you sell it before maturity, you get less. If you choose to hold it, the interest rate you earn is impaired (less than the current rate). You can sell it for less than par and buy a bond with a higher rate or keep it and the lower rate and get par at maturity.
Yes it matters. That ten you bought with a 2.5% yield that is now five years old should be compared with the rate of a five not a ten. If today the rate on the five is less than your 2.5% you can sell your original note for a gain not a loss.

Goggle "Riding the Yield Curve". As long as the yield curve is positively sloping there is some gain to had by selling a note before maturity if the curve hasn't changed too much since you bought your note. In the case above if the yield on a five has risen to more than 2.5% you do have a loss. But in that case just tax loss harvest your loss and buy a new five. The point is not to worry about the loss. It's fixed income. You get exactly what you paid for on the original purchase (assuming Treasuries). Funds can do the same thing. You see 1-10, 3-10, 3-7 funds and more. The active funds get to make the choice to sell or hold at the short end but all of them have some potential gain above and beyond the duration difference.

A couple of fund examples;

Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) - Bloomberg Barclays US Treasury 1-3 Year Bond Index

Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) - Bloomberg Barclays U.S. Treasury 3-10 Year Index
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Re: Bond ETF vs Treas

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Doc wrote: Sun Mar 04, 2018 8:42 am Goggle "Riding the Yield Curve". As long as the yield curve is positively sloping there is some gain to had by selling a note before maturity if the curve hasn't changed too much since you bought your note. In the case above if the yield on a five has risen to more than 2.5% you do have a loss. But in that case just tax loss harvest your loss and buy a new five.
This would be a wash sale if you did it exactly this way; you would need to buy a bond not substantially identical to the bond you sold, or a bond fund.

A bond fund avoids this issue because a fund holding 5-10 year Treasuries sells 5-year Treasuries and buys 10-year Treasuries, which are not substantially identical. Thus, if the fund has a capital loss one year, it can use the loss to offset a gain the next year.
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Re: Bond ETF vs Treas

Post by welderwannabe »

grabiner wrote: Sun Mar 04, 2018 5:07 pm This would be a wash sale if you did it exactly this way; you would need to buy a bond not substantially identical to the bond you sold, or a bond fund.

A bond fund avoids this issue because a fund holding 5-10 year Treasuries sells 5-year Treasuries and buys 10-year Treasuries, which are not substantially identical. Thus, if the fund has a capital loss one year, it can use the loss to offset a gain the next year.
Just wait 30 says to reinvest. 5 year treasuries are only auctioned once a month anyways.
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Re: Bond ETF vs Treas

Post by Doc »

grabiner wrote: Sun Mar 04, 2018 5:07 pm This would be a wash sale if you did it exactly this way; you would need to buy a bond not substantially identical to the bond you sold, or a bond fund.
Right. I would just buy an on the run issue with similar maturity.

If the IRS makes a ruling that these two investments are similarly identical the Treasury market would be in deep dodo. The US Treasury would have to find a new way to raise money. 😁
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Re: Bond ETF vs Treas

Post by BuyAndHoldOn »

Doc wrote: Sun Mar 04, 2018 8:42 am
michaeljc70 wrote: Sun Mar 04, 2018 7:52 am But dopes it matter? If you have a 10 year that yields 2.5% and rates go to 2.75%, the value of your bond is impaired. If you sell it before maturity, you get less. If you choose to hold it, the interest rate you earn is impaired (less than the current rate). You can sell it for less than par and buy a bond with a higher rate or keep it and the lower rate and get par at maturity.
Yes it matters. That ten you bought with a 2.5% yield that is now five years old should be compared with the rate of a five not a ten. If today the rate on the five is less than your 2.5% you can sell your original note for a gain not a loss.

Goggle "Riding the Yield Curve". As long as the yield curve is positively sloping there is some gain to had by selling a note before maturity if the curve hasn't changed too much since you bought your note. In the case above if the yield on a five has risen to more than 2.5% you do have a loss. But in that case just tax loss harvest your loss and buy a new five. The point is not to worry about the loss. It's fixed income. You get exactly what you paid for on the original purchase (assuming Treasuries). Funds can do the same thing. You see 1-10, 3-10, 3-7 funds and more. The active funds get to make the choice to sell or hold at the short end but all of them have some potential gain above and beyond the duration difference.

A couple of fund examples;

Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) - Bloomberg Barclays US Treasury 1-3 Year Bond Index

Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) - Bloomberg Barclays U.S. Treasury 3-10 Year Index

Thank you for that clear and useful explanation, Doc.
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Re: Bond ETF vs Treas

Post by michaeljc70 »

Doc wrote: Sun Mar 04, 2018 8:42 am
michaeljc70 wrote: Sun Mar 04, 2018 7:52 am But dopes it matter? If you have a 10 year that yields 2.5% and rates go to 2.75%, the value of your bond is impaired. If you sell it before maturity, you get less. If you choose to hold it, the interest rate you earn is impaired (less than the current rate). You can sell it for less than par and buy a bond with a higher rate or keep it and the lower rate and get par at maturity.
Yes it matters. That ten you bought with a 2.5% yield that is now five years old should be compared with the rate of a five not a ten. If today the rate on the five is less than your 2.5% you can sell your original note for a gain not a loss.

Goggle "Riding the Yield Curve". As long as the yield curve is positively sloping there is some gain to had by selling a note before maturity if the curve hasn't changed too much since you bought your note. In the case above if the yield on a five has risen to more than 2.5% you do have a loss. But in that case just tax loss harvest your loss and buy a new five. The point is not to worry about the loss. It's fixed income. You get exactly what you paid for on the original purchase (assuming Treasuries). Funds can do the same thing. You see 1-10, 3-10, 3-7 funds and more. The active funds get to make the choice to sell or hold at the short end but all of them have some potential gain above and beyond the duration difference.

A couple of fund examples;

Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) - Bloomberg Barclays US Treasury 1-3 Year Bond Index

Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) - Bloomberg Barclays U.S. Treasury 3-10 Year Index
Though there may be some restrictions due to the charter of a mutual fund or ETF, why else would a fund/ETF sell a bond before maturity at a loss (or a gain for that matter) if it didn't think they could buy into an equal or better bond?

In your example, if you are 3 years (instead of 5) into a 10 year, you cannot buy a 7 year bond and what is forcing you to buy a bond equal to the remaining duration anyway?

You're assuming the average Joe with a brokerage account can do so many more things than a bond professional managing a fund can.
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Re: Bond ETF vs Treas

Post by triceratop »

michaeljc70 wrote: Mon Mar 05, 2018 8:37 am
Doc wrote: Sun Mar 04, 2018 8:42 am
michaeljc70 wrote: Sun Mar 04, 2018 7:52 am But dopes it matter? If you have a 10 year that yields 2.5% and rates go to 2.75%, the value of your bond is impaired. If you sell it before maturity, you get less. If you choose to hold it, the interest rate you earn is impaired (less than the current rate). You can sell it for less than par and buy a bond with a higher rate or keep it and the lower rate and get par at maturity.
Yes it matters. That ten you bought with a 2.5% yield that is now five years old should be compared with the rate of a five not a ten. If today the rate on the five is less than your 2.5% you can sell your original note for a gain not a loss.

Goggle "Riding the Yield Curve". As long as the yield curve is positively sloping there is some gain to had by selling a note before maturity if the curve hasn't changed too much since you bought your note. In the case above if the yield on a five has risen to more than 2.5% you do have a loss. But in that case just tax loss harvest your loss and buy a new five. The point is not to worry about the loss. It's fixed income. You get exactly what you paid for on the original purchase (assuming Treasuries). Funds can do the same thing. You see 1-10, 3-10, 3-7 funds and more. The active funds get to make the choice to sell or hold at the short end but all of them have some potential gain above and beyond the duration difference.

A couple of fund examples;

Vanguard Short-Term Treasury Index Fund Admiral Shares (VSBSX) - Bloomberg Barclays US Treasury 1-3 Year Bond Index

Vanguard Intermediate-Term Treasury Index Fund Admiral Shares (VSIGX) - Bloomberg Barclays U.S. Treasury 3-10 Year Index
Though there may be some restrictions due to the charter of a mutual fund or ETF, why else would a fund/ETF sell a bond before maturity at a loss (or a gain for that matter) if it didn't think they could buy into an equal or better bond?

In your example, if you are 3 years (instead of 5) into a 10 year, you cannot buy a 7 year bond and what is forcing you to buy a bond equal to the remaining duration anyway?

You're assuming the average Joe with a brokerage account can do so many more things than a bond professional managing a fund can.
The losses occur regardless of whether the fund manager sells or holds the bond to maturity. It's simply a question of realizing the loss which is purely a tax consideration and not an investment selection decision.
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Re: Bond ETF vs Treas

Post by Doc »

michaeljc70 wrote: Mon Mar 05, 2018 8:37 am In your example, if you are 3 years (instead of 5) into a 10 year, you cannot buy a 7 year bond and what is forcing you to buy a bond equal to the remaining duration anyway?

You're assuming the average Joe with a brokerage account can do so many more things than a bond professional managing a fund can.
I can buy practically any Treasury bond that the bond professional can and so can you assuming you have a brokerage account. The only possible problem is that I may not get the "best" bid if I am selling only a handful of bonds.

Go to your favorite broker's site and logon. Migrate to the "buy bonds or CD's" tab or some variation of that and click on Treasuries.

Example from Vanguard:

Image

Nothing is forcing me to buy something with a similar duration. But normal practice when tax loss harvesting is to buy something with the same risk/reward profile that is not substantially identical to what your are selling.
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Re: Bond ETF vs Treas

Post by dbr »

Doc wrote: Mon Mar 05, 2018 10:03 am
Nothing is forcing me to buy something with a similar duration. But normal practice when tax loss harvesting is to buy something with the same risk/reward profile that is not substantially identical to what your are selling.
In the case of individual bonds there is actual case law on what is substantially identical: http://g2ft.com/papers/G2FTAdvancedTopi ... lBonds.pdf
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Re: Bond ETF vs Treas

Post by Doc »

dbr wrote: Mon Mar 05, 2018 10:32 am
Doc wrote: Mon Mar 05, 2018 10:03 am
Nothing is forcing me to buy something with a similar duration. But normal practice when tax loss harvesting is to buy something with the same risk/reward profile that is not substantially identical to what your are selling.
In the case of individual bonds there is actual case law on what is substantially identical: http://g2ft.com/papers/G2FTAdvancedTopi ... lBonds.pdf
????
* This white paper is a work in progress
10/10/2013

Maybe someone else can translate this for us. I'm lost.
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Re: Bond ETF vs Treas

Post by dbr »

Doc wrote: Mon Mar 05, 2018 1:54 pm
dbr wrote: Mon Mar 05, 2018 10:32 am
Doc wrote: Mon Mar 05, 2018 10:03 am
Nothing is forcing me to buy something with a similar duration. But normal practice when tax loss harvesting is to buy something with the same risk/reward profile that is not substantially identical to what your are selling.
In the case of individual bonds there is actual case law on what is substantially identical: http://g2ft.com/papers/G2FTAdvancedTopi ... lBonds.pdf
????
* This white paper is a work in progress
10/10/2013

Maybe someone else can translate this for us. I'm lost.
The topic brought up is tax loss harvesting or otherwise replacing individual bonds and worrying about wash sales. In distinction to the case of no definition existing for what is meant by substantially identical for mutual funds, there is case law addressing that for individual bonds. Specifically the case of Hanlin v. Commissioner applies.

If I misread and people have no interest in how one decides what is substantially identical when selling and buying individual bonds, then my post can be ignored.
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Re: Bond ETF vs Treas

Post by Doc »

dbr wrote: Mon Mar 05, 2018 2:00 pm The topic brought up is tax loss harvesting or otherwise replacing individual bonds and worrying about wash sales. In distinction to the case of no definition existing for what is meant by substantially identical for mutual funds, there is case law addressing that for individual bonds. Specifically the case of Hanlin v. Commissioner applies.

If I misread and people have no interest in how one decides what is substantially identical when selling and buying individual bonds, then my post can be ignored.
It can be noted that the ratio between the coupon rates of the two bonds (3.45% and 4.5%) is 0.77. It is possible that a practitioner might use this ratio as an indication of when two interest rates are sufficiently different so that the bonds are not to be considered SI. Of course, we cannot guess how the IRS would rule in a future case, so we are simply noting the value of the ratio and not recommending one way or the other as to how this ratio can or should be used.
op cit

It is not that I have no interest, I just don't speak lawyer.

It seems to me that if two Treasury bonds with similar maturities and YTM but with large differences in coupon were considered substantially identical that we would all know about it.

FWIW (probably very little) I made a pair of trades last week like this and our broker did not flag it as a wash sale.
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Re: Bond ETF vs Treas

Post by dbr »

Doc wrote: Mon Mar 05, 2018 2:44 pm
dbr wrote: Mon Mar 05, 2018 2:00 pm The topic brought up is tax loss harvesting or otherwise replacing individual bonds and worrying about wash sales. In distinction to the case of no definition existing for what is meant by substantially identical for mutual funds, there is case law addressing that for individual bonds. Specifically the case of Hanlin v. Commissioner applies.

If I misread and people have no interest in how one decides what is substantially identical when selling and buying individual bonds, then my post can be ignored.
It can be noted that the ratio between the coupon rates of the two bonds (3.45% and 4.5%) is 0.77. It is possible that a practitioner might use this ratio as an indication of when two interest rates are sufficiently different so that the bonds are not to be considered SI. Of course, we cannot guess how the IRS would rule in a future case, so we are simply noting the value of the ratio and not recommending one way or the other as to how this ratio can or should be used.
op cit

It is not that I have no interest, I just don't speak lawyer.

It seems to me that if two Treasury bonds with similar maturities and YTM but with large differences in coupon were considered substantially identical that we would all know about it.

FWIW (probably very little) I made a pair of trades last week like this and our broker did not flag it as a wash sale.
I think the point is that a person has to speak lawyer to even speculate on the issue. I was particularly puzzled by an earlier exchange where the statement was made that taxpayers and their accountants are held to behave according to what they believe the law to say. The question is how far investors would have to go to get opinions before they do anything.
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