Tax loss harvesting - wash sale rule

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restingonmylaurels
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Tax loss harvesting - wash sale rule

Post by restingonmylaurels » Sat Sep 08, 2018 4:34 pm

I am planning on selling my TBM shares this year to harvest the recent losses for tax purposes but I am wondering something. Clearly I cannot invest back into TBM for 30 days or become subject to the wash sale rule.

But what if I sold TBM and bought a somewhat similar fund such as the intermediate term bond index. Would that transaction be considered "substantially identical" enough to trigger the wash sale rule?

And would it make any difference if I exchanged one fund for the other versus selling one for cash and then buying the other with the proceeds?

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Re: Tax loss harvesting - wash sale rule

Post by Doc » Sat Sep 08, 2018 6:24 pm

restingonmylaurels wrote:
Sat Sep 08, 2018 4:34 pm
I am planning on selling my TBM shares this year to harvest the recent losses for tax purposes but I am wondering something. Clearly I cannot invest back into TBM for 30 days or become subject to the wash sale rule.

But what if I sold TBM and bought a somewhat similar fund such as the intermediate term bond index. Would that transaction be considered "substantially identical" enough to trigger the wash sale rule?

And would it make any difference if I exchanged one fund for the other versus selling one for cash and then buying the other with the proceeds?
As far as mutual funds are concerned substantially identical means basically the same index for index funds. But even here only the same cusip in the same account is going to be reported to the IRS. Some have even argued that even funds with the same index but different sponsors are not substantially identical. There has been no IRS guidance here.

I would not buy/sell different share classes of the same fund.

The TBM to intermediate bond is no problem . Exchange or buy/sell is irelevant.
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FiveK
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Re: Tax loss harvesting - wash sale rule

Post by FiveK » Sat Sep 08, 2018 8:03 pm

Doc wrote:
Sat Sep 08, 2018 6:24 pm
The TBM to intermediate bond is no problem.
+1

OP, note that the phrase is "substantially identical" and not "substantially similar". In other words, it can be an issue if you trade things that really are the same but have different names. No problem if one is only "similar to" another. E.g., the total bond market is not the same as a portion of the bond market.

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Re: Tax loss harvesting - wash sale rule

Post by gostars » Sat Sep 08, 2018 9:18 pm

Assuming you're holding Vanguard Total Bond Market (BND/VBTLX/VBMFX), you could simply switch to the iShares AGG or Schwab SCHZ ETFs, which are also aggregate bond funds, but track a different index from Vanguard's (the one Vanguard uses is float-adjusted, the one iShares and Schwab use is not). The performance is close enough that they're interchangeable, but since the weightings are different, they aren't substantially identical.

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Re: Tax loss harvesting - wash sale rule

Post by Greenman72 » Sat Sep 08, 2018 9:40 pm

As a CPA, I have seen no clear guidance on this.

My position is this—different share classes are subject to the wash sale, but a virtually identical fund from a different provider is okay.

So to sell Vanguard 500 investor class and buy Vanguard 500 admiral class would trigger a wash sale (if I caught it). But to sell a vanguard 500 fund and buy the Schwab 500 fund would not.

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Re: Tax loss harvesting - wash sale rule

Post by duuuuuude » Sun Sep 09, 2018 12:33 am

Wash sale also applies to 30 days prior to selling....so watch out for automatic reinvestments, which means the 30 day window is more like 60 days of a clear window.

I made that mistake earlier this year, thinking I was clear. I was selling an older lot of shares, ut didn't account for the fact that I had dividends automatically reinvested, which hit less than 30 days prior to my sell date.

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Re: Tax loss harvesting - wash sale rule

Post by restingonmylaurels » Sun Sep 09, 2018 6:38 am

Doc wrote:
Sat Sep 08, 2018 6:24 pm
As far as mutual funds are concerned substantially identical means basically the same index for index funds. But even here only the same cusip in the same account is going to be reported to the IRS. Some have even argued that even funds with the same index but different sponsors are not substantially identical. There has been no IRS guidance here.
Yes, it is the lack of guidance on this nearly 100-year-old rule that makes it a bit of an adventure.

Kitces has an article https://www.kitces.com/blog/the-wash-sa ... -and-etfs/ where they believe the approach should be "the easiest “red flag” warning is simply to look at the correlation between the original investment being loss-harvested, and the replacement security; at correlations above 0.95, and especially at 0.99+, it’s difficult to argue that the securities are not ”substantially identical” to each other in performance."

Forbes noted https://www.forbes.com/sites/baldwin/20 ... 4cce0372d7 that it would not be a good idea to replace one index fund with another.

While changing from an index fund to active fund may solve the problem, I wish to stay only within VG with a similar type of investment and approach.

In my scenario, while TBM and ITBI do use different indices, their respective correlations (R-squared) to the Bloomberg Barclays U.S. Aggregate Bond Index are 0.99 and 0.97.

Would this not push this proposed transaction into the wash-sale gray-zone that the above articles describe?

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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Sun Sep 09, 2018 7:49 am

This should be no problem, but Bogleheads are not subject to being witnesses at your IRS hearing.

As was mentioned, do not forget to stop automatic reinvestment of dividends and capital gains. You might just move everything into the Federal Money Market settlement fund. You would not be out of TBM for that long, and more easily switch back to that fund when the waiting period expires.
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Re: Tax loss harvesting - wash sale rule

Post by student » Sun Sep 09, 2018 8:03 am

restingonmylaurels wrote:
Sun Sep 09, 2018 6:38 am
Doc wrote:
Sat Sep 08, 2018 6:24 pm
As far as mutual funds are concerned substantially identical means basically the same index for index funds. But even here only the same cusip in the same account is going to be reported to the IRS. Some have even argued that even funds with the same index but different sponsors are not substantially identical. There has been no IRS guidance here.
Yes, it is the lack of guidance on this nearly 100-year-old rule that makes it a bit of an adventure.

Kitces has an article https://www.kitces.com/blog/the-wash-sa ... -and-etfs/ where they believe the approach should be "the easiest “red flag” warning is simply to look at the correlation between the original investment being loss-harvested, and the replacement security; at correlations above 0.95, and especially at 0.99+, it’s difficult to argue that the securities are not ”substantially identical” to each other in performance."

Forbes noted https://www.forbes.com/sites/baldwin/20 ... 4cce0372d7 that it would not be a good idea to replace one index fund with another.

While changing from an index fund to active fund may solve the problem, I wish to stay only within VG with a similar type of investment and approach.

In my scenario, while TBM and ITBI do use different indices, their respective correlations (R-squared) to the Bloomberg Barclays U.S. Aggregate Bond Index are 0.99 and 0.97.

Would this not push this proposed transaction into the wash-sale gray-zone that the above articles describe?
No guidance is precisely the problem. For example, Betterment is more aggressive in its TLH strategy. https://www.betterment.com/resources/re ... ite-paper/ Personally, I would say TBM and ITBI are not substantially identical. Currently TBM has about 64% US government bond and ITBI has only about 53%. Currently TBM has fewer bonds below A than TBM. Why would Vanguard offer two substantially identical funds? Also the product descriptions are very different. One has "This fund is designed to provide broad exposure to U.S. investment grade bonds. Reflecting this goal, the fund invests about 30% in corporate bonds and 70% in U.S. government bonds of all maturities (short-, intermediate-, and long-term issues) " and another has "This index fund offers a low-cost, diversified approach to bond investing, providing broad exposure to U.S. investment-grade bonds with maturities from five to ten years. Reflecting this goal, the fund invests about 50% of assets in corporate bonds and 50% in U.S. government bonds within that maturity range."

I think using correlation is not a good measure. Substantially identical funds implies they have high correlation. The converse may not be true.

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Re: Tax loss harvesting - wash sale rule

Post by Doc » Sun Sep 09, 2018 8:12 am

student wrote:
Sun Sep 09, 2018 8:03 am
I think using correlation is not a good measure. Substantially identical funds implies they have high correlation. The converse may not be true.
Agreed.

As I recall the IRS "guidance" involves things like selling a stock at a loss and buying a call option for the same stock. Here you have exactly the same financial position. You just got there by other means.
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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Sun Sep 09, 2018 2:19 pm

Doc wrote:
Sat Sep 08, 2018 6:24 pm
As far as mutual funds are concerned substantially identical means basically the same index for index funds.
There is no evidence that this is the case. In fact, I don't agree with it. I had no qualms about doing a TLH by selling VOO and buying IVV (two S&P 500 index ETFs).

The bottom line is that no one really knows what it means. There's never been an indentified case of the IRS declaring a wash between funds from different providers. There's been no guidance from the IRS or Congress. The IRS implemented the covered shares to get the easiest low-hanging fruit. I think that is about the extent of their interest. They have many more pressing issues. Like millions flowing out to scammers, foreign and domestic, through fraudulent returns.

People are surprisingly afraid of wash sales.
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Re: Tax loss harvesting - wash sale rule

Post by Doc » Sun Sep 09, 2018 6:34 pm

Earl Lemongrab wrote:
Sun Sep 09, 2018 2:19 pm
Doc wrote:
Sat Sep 08, 2018 6:24 pm
As far as mutual funds are concerned substantially identical means basically the same index for index funds.
There is no evidence that this is the case. In fact, I don't agree with it. I had no qualms about doing a TLH by selling VOO and buying IVV (two S&P 500 index ETFs).

The bottom line is that no one really knows what it means. There's never been an indentified case of the IRS declaring a wash between funds from different providers. There's been no guidance from the IRS or Congress. The IRS implemented the covered shares to get the easiest low-hanging fruit. I think that is about the extent of their interest. They have many more pressing issues. Like millions flowing out to scammers, foreign and domestic, through fraudulent returns.

People are surprisingly afraid of wash sales.
We are not in disagreement on what is "substantially identical". But I don't know what the IRS's position is since there has never been any guidance wrt mutual funds.

My "fear of wash sales" comes from tax loss harvesting because I want to maintain my position so I sell in taxable and buy similar but not substantially identical positions in tax advantaged the same day or with respect to foreign the same hour. OK maybe that's paranoid. :) I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
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Re: Tax loss harvesting - wash sale rule

Post by Nate79 » Sun Sep 09, 2018 7:04 pm

Doc wrote:
Sun Sep 09, 2018 6:34 pm
Earl Lemongrab wrote:
Sun Sep 09, 2018 2:19 pm
Doc wrote:
Sat Sep 08, 2018 6:24 pm
As far as mutual funds are concerned substantially identical means basically the same index for index funds.
There is no evidence that this is the case. In fact, I don't agree with it. I had no qualms about doing a TLH by selling VOO and buying IVV (two S&P 500 index ETFs).

The bottom line is that no one really knows what it means. There's never been an indentified case of the IRS declaring a wash between funds from different providers. There's been no guidance from the IRS or Congress. The IRS implemented the covered shares to get the easiest low-hanging fruit. I think that is about the extent of their interest. They have many more pressing issues. Like millions flowing out to scammers, foreign and domestic, through fraudulent returns.

People are surprisingly afraid of wash sales.
We are not in disagreement on what is "substantially identical". But I don't know what the IRS's position is since there has never been any guidance wrt mutual funds.

My "fear of wash sales" comes from tax loss harvesting because I want to maintain my position so I sell in taxable and buy similar but not substantially identical positions in tax advantaged the same day or with respect to foreign the same hour. OK maybe that's paranoid. :) I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
The IRS has given guidance on mutual funds in the past.

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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Sun Sep 09, 2018 7:13 pm

It would, it seems, fall on each individual investor to decide for herself if two investments are "substantially identical". For me, if the two investments track an identical index, no matter the ticker symbols, I consider them to be "substantially identical". Unless and until the IRS hits one of us with penalties, we won't know for sure.
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Re: Tax loss harvesting - wash sale rule

Post by Doc » Mon Sep 10, 2018 7:20 am

Nate79 wrote:
Sun Sep 09, 2018 7:04 pm
The IRS has given guidance on mutual funds in the past.
That's very interesting. What is the guidence? Do you have a source?
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Re: Tax loss harvesting - wash sale rule

Post by Nate79 » Mon Sep 10, 2018 9:51 am

Doc wrote:
Mon Sep 10, 2018 7:20 am
Nate79 wrote:
Sun Sep 09, 2018 7:04 pm
The IRS has given guidance on mutual funds in the past.
That's very interesting. What is the guidence? Do you have a source?
I was referring to IRS publication 564 which said that two mutual funds can not be considered as substantially identical. This was guidance in the past. Whether it is applicable or not today? Don't know.

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Re: Tax loss harvesting - wash sale rule

Post by MnD » Mon Sep 10, 2018 10:31 am

The "wash sale" resulting from the sale and purchase two different mutual funds is the Chupacabra and Bigfoot of this forum.
Often discussed but never any credible evidence that it exists.
I'd be more worried about reporting a false wash sale by selling fund ABC and buying fund XYZ and then reporting it as a wash sale.

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Re: Tax loss harvesting - wash sale rule

Post by Doc » Mon Sep 10, 2018 10:42 am

Nate79 wrote:
Mon Sep 10, 2018 9:51 am
Doc wrote:
Mon Sep 10, 2018 7:20 am
Nate79 wrote:
Sun Sep 09, 2018 7:04 pm
The IRS has given guidance on mutual funds in the past.
That's very interesting. What is the guidence? Do you have a source?
I was referring to IRS publication 564 which said that two mutual funds can not be considered as substantially identical. This was guidance in the past. Whether it is applicable or not today? Don't know.
Publication 564
Mutual Fund Distributions
For use in preparing 2009 Returns
Substantially identical: In determining whether the shares are substantially identical, you must consider all the facts and circumstances. Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund.
https://www.irs.gov/pub/irs-prior/p564--2009.pdf

This Publication no longer exists in the IRS Publications list https://www.irs.gov/publications?page=1

But it's at least an argument if you were challenged.
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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Mon Sep 10, 2018 10:51 am

My readings on the subject have brought me to consider that the term "substantially identical" was meant to be a very technical one. That allowed financial instruments that were convertible to or otherwise linked to another instrument to be the same for wash sales. All of the examples given by the IRS are things like options, "warrants" (a type of instrument similar to options) and preferred stock convertible to common stock. I don't think it was ever intended to address broad issues like different mutual funds.

I believe that mutual fund share classes that can convert to a different class without tax liability are substantially identical for the reasons given above. I think that includes Vanguard ETF to other share classes even though Vanguard doesn't allow direct conversion. I think that's just a decision on their part and not any legal distinction. So regardless of whether two mutual funds track the same index or not, I think the sentiment expressed in 564 still is the operative one.
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Re: Tax loss harvesting - wash sale rule

Post by rkhusky » Mon Sep 10, 2018 11:39 am

Earl Lemongrab wrote:
Mon Sep 10, 2018 10:51 am
I believe that mutual fund share classes that can convert to a different class without tax liability are substantially identical for the reasons given above. I think that includes Vanguard ETF to other share classes even though Vanguard doesn't allow direct conversion. I think that's just a decision on their part and not any legal distinction. So regardless of whether two mutual funds track the same index or not, I think the sentiment expressed in 564 still is the operative one.
Since "identical" and "substantially identical" should mean different things, under the above interpretation "identical" would be something like Vanguard Total Stock Market Investor -> Vanguard Total Stock Market Investor, and "substantially identical" would be something like Vanguard Total Stock Market Investor -> Vanguard Total Stock Market Admiral. Investor and Admiral shares have different CUSIP numbers and would not be considered identical investments.

Another interpretation would have Investor and Admiral shares being "identical" because they have identical holdings. "Substantially identical" could then be two mutual funds that track the same index without sampling. That seems to be the closest one could get to "identical" holdings without being identical.

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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Mon Sep 10, 2018 12:21 pm

rkhusky wrote:
Mon Sep 10, 2018 11:39 am
Earl Lemongrab wrote:
Mon Sep 10, 2018 10:51 am
I believe that mutual fund share classes that can convert to a different class without tax liability are substantially identical for the reasons given above. I think that includes Vanguard ETF to other share classes even though Vanguard doesn't allow direct conversion. I think that's just a decision on their part and not any legal distinction. So regardless of whether two mutual funds track the same index or not, I think the sentiment expressed in 564 still is the operative one.
Since "identical" and "substantially identical" should mean different things, under the above interpretation "identical" would be something like Vanguard Total Stock Market Investor -> Vanguard Total Stock Market Investor, and "substantially identical" would be something like Vanguard Total Stock Market Investor -> Vanguard Total Stock Market Admiral. Investor and Admiral shares have different CUSIP numbers and would not be considered identical investments.

Another interpretation would have Investor and Admiral shares being "identical" because they have identical holdings. "Substantially identical" could then be two mutual funds that track the same index without sampling. That seems to be the closest one could get to "identical" holdings without being identical.
I don't agree with any of that. The different share classes have differences such as expense ratio or trading requirements. They aren't identical. Shares of funds from one company can't be converted to shares of another in any fashion. So they are NOT substantially identical.

People have become fixated on the holdings of mutual funds, even though those products are more complex than their holdings or even their sampling methods.
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Re: Tax loss harvesting - wash sale rule

Post by ivk5 » Mon Sep 10, 2018 1:35 pm

Doc wrote:
Sun Sep 09, 2018 6:34 pm
I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
That is a risk if replacement shares are in tax-advantaged accounts. But that should be readily avoidable by thoughtful arrangement of holdings or disabling auto-reinvestment of distributions and tolerating a bit of cash drag.

If replacement shares are in taxable, the disallowed loss increases basis of replacement shares or reduced eventual taxable gains. However the benefit may be deferred for years or decades. Yes, there is still some risk the benefit may be lost (0% LTCG rate, donation of shares, or step-up at death, etc). However those are somewhat plannable.

Disallowed loss isn’t necessarily lost forever.

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Re: Tax loss harvesting - wash sale rule

Post by Doc » Mon Sep 10, 2018 3:10 pm

ivk5 wrote:
Mon Sep 10, 2018 1:35 pm
Doc wrote: ↑Sun Sep 09, 2018 6:34 pm
I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
That is a risk if replacement shares are in tax-advantaged accounts. But that should be readily avoidable by thoughtful arrangement of holdings or disabling auto-reinvestment of distributions and tolerating a bit of cash drag.
You cut out most of my response:
Doc wrote:
Sun Sep 09, 2018 6:34 pm
My "fear of wash sales" comes from tax loss harvesting because I want to maintain my position so I sell in taxable and buy similar but not substantially identical positions in tax advantaged the same day or with respect to foreign the same hour. OK maybe that's paranoid. I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
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Re: Tax loss harvesting - wash sale rule

Post by ivk5 » Mon Sep 10, 2018 3:25 pm

Doc wrote:
Mon Sep 10, 2018 3:10 pm
ivk5 wrote:
Mon Sep 10, 2018 1:35 pm
Doc wrote: ↑Sun Sep 09, 2018 6:34 pm
I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
That is a risk if replacement shares are in tax-advantaged accounts. But that should be readily avoidable by thoughtful arrangement of holdings or disabling auto-reinvestment of distributions and tolerating a bit of cash drag.
You cut out most of my response:
Doc wrote:
Sun Sep 09, 2018 6:34 pm
My "fear of wash sales" comes from tax loss harvesting because I want to maintain my position so I sell in taxable and buy similar but not substantially identical positions in tax advantaged the same day or with respect to foreign the same hour. OK maybe that's paranoid. I don't want the guv to take away my tax loss for now and never let me get it back when I sell my replacement sales.
I stand corrected.

Nevertheless this is readily avoidable by buying alternate funds/ETFs that maintain your exposure to the asset class but are very likely not “substantially identical.”

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Re: Tax loss harvesting - wash sale rule

Post by Doc » Mon Sep 10, 2018 4:46 pm

ivk5 wrote:
Mon Sep 10, 2018 3:25 pm
Nevertheless this is readily avoidable by buying alternate funds/ETFs that maintain your exposure to the asset class but are very likely not “substantially identical.”
Agreed. The reason I usually do TLH using replacement assets in tax advantaged is so that I can restore my original position after 30 days with little consequence other than perhaps some transaction costs.
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Re: Tax loss harvesting - wash sale rule

Post by jclear » Tue Sep 11, 2018 12:29 am

restingonmylaurels wrote:
Sun Sep 09, 2018 6:38 am
Kitces has an article https://www.kitces.com/blog/the-wash-sa ... -and-etfs/ where they believe the approach should be "the easiest “red flag” warning is simply to look at the correlation between the original investment being loss-harvested, and the replacement security; at correlations above 0.95, and especially at 0.99+, it’s difficult to argue that the securities are not ”substantially identical” to each other in performance."
Correlation is a terrible measure; it doesn't capture differences in risk and return. Note that you can have two well diversified portfolios with very different betas and they can be strongly correlated. VTSMX and VFINX have 0.99 correlation. It's absurd to think that they're substantially identical.

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Re: Tax loss harvesting - wash sale rule

Post by michaeljc70 » Tue Sep 11, 2018 9:01 am

As has been said, we don't have a lot of legal guidance to go off of. From a practical perspective, I doubt the IRS is going to flag anything that isn't the same security unless it is a huge amount or there is an audit for another reason and manually looked at. I think if they had tables of what they considered "substantially identical" funds in their database, we would have heard about it by now.

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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Thu Sep 13, 2018 6:31 am

Earl Lemongrab wrote:
Mon Sep 10, 2018 12:21 pm
rkhusky wrote:
Mon Sep 10, 2018 11:39 am
Earl Lemongrab wrote:
Mon Sep 10, 2018 10:51 am
I believe that mutual fund share classes that can convert to a different class without tax liability are substantially identical for the reasons given above. I think that includes Vanguard ETF to other share classes even though Vanguard doesn't allow direct conversion. I think that's just a decision on their part and not any legal distinction. So regardless of whether two mutual funds track the same index or not, I think the sentiment expressed in 564 still is the operative one.
Since "identical" and "substantially identical" should mean different things, under the above interpretation "identical" would be something like Vanguard Total Stock Market Investor -> Vanguard Total Stock Market Investor, and "substantially identical" would be something like Vanguard Total Stock Market Investor -> Vanguard Total Stock Market Admiral. Investor and Admiral shares have different CUSIP numbers and would not be considered identical investments.

Another interpretation would have Investor and Admiral shares being "identical" because they have identical holdings. "Substantially identical" could then be two mutual funds that track the same index without sampling. That seems to be the closest one could get to "identical" holdings without being identical.
I don't agree with any of that. The different share classes have differences such as expense ratio or trading requirements. They aren't identical. Shares of funds from one company can't be converted to shares of another in any fashion. So they are NOT substantially identical.

People have become fixated on the holdings of mutual funds, even though those products are more complex than their holdings or even their sampling methods.
Just curious if you'd consider owning ten shares each of Amazon, Microsoft, and Exxon in Fidelity "substantially identical" to owning ten shares each of Amazon, Microsoft, and Exxon in Schwab.
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Re: Tax loss harvesting - wash sale rule

Post by Doc » Thu Sep 13, 2018 7:53 am

fortyofforty wrote:
Thu Sep 13, 2018 6:31 am
Just curious if you'd consider owning ten shares each of Amazon, Microsoft, and Exxon in Fidelity "substantially identical" to owning ten shares each of Amazon, Microsoft, and Exxon in Schwab.
These are not only substantially identical but exactly identical. The "substantially" concept comes from selling shares at a loss and buying a call on the same security or some other type of option.

Your example while a wash sale if a sell at loss rebuy scenario, would not be reported to the IRS because of the exact regs. Schwab does not know of a sale at Fidelity.

Edit: corrected typo.
Last edited by Doc on Thu Sep 13, 2018 10:52 am, edited 1 time in total.
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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Thu Sep 13, 2018 10:14 am

fortyofforty wrote:
Thu Sep 13, 2018 6:31 am
Just curious if you'd consider owning ten shares each of Amazon, Microsoft, and Exxon in Fidelity "substantially identical" to owning ten shares each of Amazon, Microsoft, and Exxon in Schwab.
This is a frivolous question. The law and the IRS pubs already explicitly cover the situation.
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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Thu Sep 13, 2018 5:32 pm

Earl Lemongrab wrote:
Thu Sep 13, 2018 10:14 am
fortyofforty wrote:
Thu Sep 13, 2018 6:31 am
Just curious if you'd consider owning ten shares each of Amazon, Microsoft, and Exxon in Fidelity "substantially identical" to owning ten shares each of Amazon, Microsoft, and Exxon in Schwab.
This is a frivolous question. The law and the IRS pubs already explicitly cover the situation.
It's only frivolous because you don't want to admit that owning an S&P 500 Index Fund from one adviser could be considered "substantially identical" to holding an S&P 500 Index Fund from another adviser. I wouldn't swap Investor for Admiral shares, or jump from Fidelity to Vanguard S&P 500 Index Funds, since the underlying holdings are exactly the same. But, that's your prerogative, and those who wish to follow your "advice". It's a free country. Your own choices. Own your choices.
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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Thu Sep 13, 2018 6:47 pm

fortyofforty wrote:
Thu Sep 13, 2018 5:32 pm
Earl Lemongrab wrote:
Thu Sep 13, 2018 10:14 am
fortyofforty wrote:
Thu Sep 13, 2018 6:31 am
Just curious if you'd consider owning ten shares each of Amazon, Microsoft, and Exxon in Fidelity "substantially identical" to owning ten shares each of Amazon, Microsoft, and Exxon in Schwab.
This is a frivolous question. The law and the IRS pubs already explicitly cover the situation.
It's only frivolous because you don't want to admit that owning an S&P 500 Index Fund from one adviser could be considered "substantially identical" to holding an S&P 500 Index Fund from another adviser. I wouldn't swap Investor for Admiral shares, or jump from Fidelity to Vanguard S&P 500 Index Funds, since the underlying holdings are exactly the same. But, that's your prerogative, and those who wish to follow your "advice". It's a free country. Your own choices. Own your choices.
A fund is more than a collection of stocks. If I had what you say, I could sell the Facebook and keep the rest. Can I do that with an S&P 500 fund?

You somehow want to make those the same, but they aren't. It's a frivolous and incorrect example.
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Re: Tax loss harvesting - wash sale rule

Post by Thesaints » Thu Sep 13, 2018 6:58 pm

fortyofforty wrote:
Thu Sep 13, 2018 5:32 pm
It's only frivolous because you don't want to admit that owning an S&P 500 Index Fund from one adviser could be considered "substantially identical" to holding an S&P 500 Index Fund from another adviser. I wouldn't swap Investor for Admiral shares, or jump from Fidelity to Vanguard S&P 500 Index Funds, since the underlying holdings are exactly the same. But, that's your prerogative, and those who wish to follow your "advice". It's a free country. Your own choices. Own your choices.
I'm with you, moving from Vanguard S&P500 to Fidelity S&P500 should not allow you to take the loss. Should it allow you to ignore gains, as well ?

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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Thu Sep 13, 2018 7:27 pm

Thesaints wrote:
Thu Sep 13, 2018 6:58 pm
fortyofforty wrote:
Thu Sep 13, 2018 5:32 pm
It's only frivolous because you don't want to admit that owning an S&P 500 Index Fund from one adviser could be considered "substantially identical" to holding an S&P 500 Index Fund from another adviser. I wouldn't swap Investor for Admiral shares, or jump from Fidelity to Vanguard S&P 500 Index Funds, since the underlying holdings are exactly the same. But, that's your prerogative, and those who wish to follow your "advice". It's a free country. Your own choices. Own your choices.
I'm with you, moving from Vanguard S&P500 to Fidelity S&P500 should not allow you to take the loss. Should it allow you to ignore gains, as well ?
I am not a tax attorney. IMO you are owning the "basket" of stocks, in the proportion demanded by the underlying index. Whether you do that through Fidelity, Vanguard, Schwab or other company, you are still investing in the same (substantially identical) basket. Actively managed funds, or funds that follow a different index should be no issue, IMO.

If I pay a broker and tell him to invest in stocks A, B, and C. Then I tell another broker at a different brokerage to invest in stocks A, B, and C, I don't think I could use those two brokerage accounts to avoid the wash sale rule. It seems to me choosing two S&P 500 "baskets" in two competing fund companies is not substantially different. In fact, it seems substantially identical.

Others, apparently, disagree with this obvious logic. The wordings isn't "identical", it's "substantially identical".
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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Thu Sep 13, 2018 7:45 pm

That has nothing to do with your incorrect analogy. The security you hold with the index fund is a share of the fund. That might be a full basket of stocks. Or some of the stock sampled in a way the fund managers think appropriate. What don't have is a collection of individual stocks under your control.
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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Thu Sep 13, 2018 8:55 pm

Your dispute is ill-founded. When you buy a fund that has, as its mandate, to follow a particular index, you are choosing to own that basket of stocks, indirectly. An actively managed fund is quite different. However, an index fund is mandated to follow a certain index or, if it's something like a total market fund, a substantially identical sample thereof.

IMO you're wrong, and I wouldn't want to face the taxman on your side of this argument. Your choice. Bad advice, though, IMO, so I'd say tread carefully if someone chooses to follow it. I prefer to err on the side of caution when dealing with the IRS, but that's me.
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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Thu Sep 13, 2018 11:21 pm

I won't bother arguing with you. You don't have the basic knowledge.
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Re: Tax loss harvesting - wash sale rule

Post by ivk5 » Thu Sep 13, 2018 11:24 pm

fortyofforty wrote:
Thu Sep 13, 2018 8:55 pm
Your dispute is ill-founded. When you buy a fund that has, as its mandate, to follow a particular index, you are choosing to own that basket of stocks, indirectly. An actively managed fund is quite different. However, an index fund is mandated to follow a certain index or, if it's something like a total market fund, a substantially identical sample thereof.

IMO you're wrong, and I wouldn't want to face the taxman on your side of this argument. Your choice. Bad advice, though, IMO, so I'd say tread carefully if someone chooses to follow it. I prefer to err on the side of caution when dealing with the IRS, but that's me.
Earl, I am not sure most would make the argument quite the way fortyofforty has here, but my impression is that it is a majority view among BHs that two funds tracking the exact same index (not just same asset class) should be considered substantially identical for TLH purposes, notwithstanding minor differences in management (trading, expenses, securities lending, etc).

The economic exposure is materially the same, in much the same way options can provide substantially identical economic exposure to owning the underlying. (There are minor differences in expenses/etc there too.)

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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Thu Sep 13, 2018 11:28 pm

ivk5 wrote:
Thu Sep 13, 2018 11:24 pm
Earl, I am not sure most would make the argument quite the way fortyofforty has here, but my impression is that it is a majority view among BHs that two funds tracking the exact same index (not just same asset class) should be considered substantially identical for TLH purposes, notwithstanding minor differences in management (trading, expenses, securities lending, etc).
That's fine, you and I can have a difference of opinion on that. What he posted is just not factual. A group of stocks owned by an individual is not equivalent to a mutual fund. The rules that apply to mutual funds don't apply to that group. The IRS has made it clear the which account a security is held in doesn't matter. The fact that he put that out as an analogy demonstrates that he doesn't understand the basics.
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Re: Tax loss harvesting - wash sale rule

Post by Doc » Fri Sep 14, 2018 7:00 am

There is no IRS guidance on two index mutual funds following the same index. I choose not to be a test case. Since I buy my replacement in tax advantaged and keep the position for only 30 days is very easy to buy a replacement fund that follows a different index but has the expectation of providing similar returns over that short period.
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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Fri Sep 14, 2018 7:32 am

Earl Lemongrab wrote:
Thu Sep 13, 2018 11:28 pm
ivk5 wrote:
Thu Sep 13, 2018 11:24 pm
Earl, I am not sure most would make the argument quite the way fortyofforty has here, but my impression is that it is a majority view among BHs that two funds tracking the exact same index (not just same asset class) should be considered substantially identical for TLH purposes, notwithstanding minor differences in management (trading, expenses, securities lending, etc).
That's fine, you and I can have a difference of opinion on that. What he posted is just not factual. A group of stocks owned by an individual is not equivalent to a mutual fund. The rules that apply to mutual funds don't apply to that group. The IRS has made it clear the which account a security is held in doesn't matter. The fact that he put that out as an analogy demonstrates that he doesn't understand the basics.
Sorry, but you're clearly wrong. A group of stocks held in street name for an individual based on clear, direct, specific guidance even down to the level of knowing which stocks make up that portfolio is substantially identical to that exact same basket of stocks held in street name at another brokerage. You can extrapolate this example to a basket of 500 stocks, held in an index named, not coincidentally, the S&P 500 Index, and the funds that follow by design.

You are, sadly, compounding ignorance with poor advice, which could have enormous tax consequences for the unfortunate person who serves as the test case. It's clear some here aren't used to being challenged with facts and logic, but I will continue to do so, especially if it might save an investor from making a terrible mistake.
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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Fri Sep 14, 2018 7:35 am

Earl Lemongrab wrote:
Thu Sep 13, 2018 11:21 pm
I won't bother arguing with you. You don't have the basic knowledge.
Keep arguing indirectly, then. It's as different as two funds that follow the S&P 500 index. :beer I'm done trying to educate you, as it appears hopeless. People can read your "advice" and make up their own minds.
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Re: Tax loss harvesting - wash sale rule

Post by Nate79 » Fri Sep 14, 2018 9:56 am

I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.

To broadly say to mutual funds that track the same index are substantially identical is false and we know this to be false. For those that actually read the case law review that was posted recently (I think in another thread) where it went thru the case law of SI for bonds there are clear examples that show how there could be examples of index funds tracking the same index that are not SI.

Consider these two examples:

1). Two S&P500 index funds but one has an ER of 0.04% and one has an ER of X% (let's say 0.5% or let's say 1%). There total returns are different. Are they SI?
2). Two S&P500 index funds, one pays their dividends quarterly and one pays dividends annually. Are they SI?

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Re: Tax loss harvesting - wash sale rule

Post by Earl Lemongrab » Fri Sep 14, 2018 11:53 am

Nate79 wrote:
Fri Sep 14, 2018 9:56 am
I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.
Sure would be handy if that pub were still active.
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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Fri Sep 14, 2018 12:27 pm

Nate79 wrote:
Fri Sep 14, 2018 9:56 am
I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.

To broadly say to mutual funds that track the same index are substantially identical is false and we know this to be false. For those that actually read the case law review that was posted recently (I think in another thread) where it went thru the case law of SI for bonds there are clear examples that show how there could be examples of index funds tracking the same index that are not SI.

Consider these two examples:

1). Two S&P500 index funds but one has an ER of 0.04% and one has an ER of X% (let's say 0.5% or let's say 1%). There total returns are different. Are they SI?
2). Two S&P500 index funds, one pays their dividends quarterly and one pays dividends annually. Are they SI?
If you are going to claim that you can shift money between Vanguard S&P 500 Admiral and Vanguard S&P 500 Investor shares, and claim the tax loss without wash sale consequences, I think you are wrong, and possibly making a costly mistake. As was said above by another poster, I don't want to be the test case.

Best of luck with your tax strategy. I know what I am comfortable doing, and that sure isn't it.
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Re: Tax loss harvesting - wash sale rule

Post by Nate79 » Fri Sep 14, 2018 12:29 pm

fortyofforty wrote:
Fri Sep 14, 2018 12:27 pm
Nate79 wrote:
Fri Sep 14, 2018 9:56 am
I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.

To broadly say to mutual funds that track the same index are substantially identical is false and we know this to be false. For those that actually read the case law review that was posted recently (I think in another thread) where it went thru the case law of SI for bonds there are clear examples that show how there could be examples of index funds tracking the same index that are not SI.

Consider these two examples:

1). Two S&P500 index funds but one has an ER of 0.04% and one has an ER of X% (let's say 0.5% or let's say 1%). There total returns are different. Are they SI?
2). Two S&P500 index funds, one pays their dividends quarterly and one pays dividends annually. Are they SI?
If you are going to claim that you can shift money between Vanguard S&P 500 Admiral and Vanguard S&P 500 Investor shares, and claim the tax loss without wash sale consequences, I think you are wrong, and possibly making a costly mistake. As was said above by another poster, I don't want to be the test case.

Best of luck with your tax strategy. I know what I am comfortable doing, and that sure isn't it.
No one said that anywhere. You are picking two funds that are just share class differences of the same family. How about we stay on topic here and quit making up scenarios no one is talking about?

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Re: Tax loss harvesting - wash sale rule

Post by iceport » Fri Sep 14, 2018 1:21 pm

Nate79 wrote:
Fri Sep 14, 2018 9:56 am
I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.

To broadly say to mutual funds that track the same index are substantially identical is false and we know this to be false. For those that actually read the case law review that was posted recently (I think in another thread) where it went thru the case law of SI for bonds there are clear examples that show how there could be examples of index funds tracking the same index that are not SI.

Consider these two examples:

1). Two S&P500 index funds but one has an ER of 0.04% and one has an ER of X% (let's say 0.5% or let's say 1%). There total returns are different. Are they SI?
2). Two S&P500 index funds, one pays their dividends quarterly and one pays dividends annually. Are they SI?
Wasn't that old guidance written before index funds were in common use?

Anyway, taking the letter of the law so far away from the spirit of the law in the two examples offered keeps me questioning why folks think they wrote the wash sale rules in the first place. If they wanted to close a tax haven for those holding the securities of the day — i.e. not mutual funds or ETFs — it wouldn't make sense to make it so easy to open it back up again.

This is a coupon-clipping interpretation of wash sales: Scan a free coupon at the cash register and you save money. Use your promo code and save. Exchange your losing index fund from Fund Company A for an index fund tracking exactly the same index from Fund Company B and, voila, with a few extra keystrokes the wash sale rules don't apply to you. (Except in the case of wash sales, there is no reason to promote tax avoidance.)

Maybe the 1921 equivalent would be if they let investors by-pass the wash sale rules by using one stock broker to sell the losing stock and a different stock broker to buy it back again.
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Re: Tax loss harvesting - wash sale rule

Post by fortyofforty » Fri Sep 14, 2018 2:19 pm

Nate79 wrote:
Fri Sep 14, 2018 12:29 pm
fortyofforty wrote:
Fri Sep 14, 2018 12:27 pm
Nate79 wrote:
Fri Sep 14, 2018 9:56 am
I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.

To broadly say to mutual funds that track the same index are substantially identical is false and we know this to be false. For those that actually read the case law review that was posted recently (I think in another thread) where it went thru the case law of SI for bonds there are clear examples that show how there could be examples of index funds tracking the same index that are not SI.

Consider these two examples:

1). Two S&P500 index funds but one has an ER of 0.04% and one has an ER of X% (let's say 0.5% or let's say 1%). There total returns are different. Are they SI?
2). Two S&P500 index funds, one pays their dividends quarterly and one pays dividends annually. Are they SI?
If you are going to claim that you can shift money between Vanguard S&P 500 Admiral and Vanguard S&P 500 Investor shares, and claim the tax loss without wash sale consequences, I think you are wrong, and possibly making a costly mistake. As was said above by another poster, I don't want to be the test case.

Best of luck with your tax strategy. I know what I am comfortable doing, and that sure isn't it.
No one said that anywhere. You are picking two funds that are just share class differences of the same family. How about we stay on topic here and quit making up scenarios no one is talking about?
Try to keep up. Maybe go back and reread the posts, including your own.

If you are going to claim that you can use two Index Funds that track exactly the same index, with the only difference being the expense ratios (your own example, which I can quote for you if you can't find it), then there is no difference except in how much you are charged to own the two funds.

The only difference between Admiral Shares and Investor Shares of the S&P 500 Index Fund from Vanguard is, wait for it....

EXPENSE RATIOS.

The example I provided merely took your own example and carried it to its logical and inevitable end point. Different ticker symbols. Different expense ratios. Different total returns. Same underlying index tracked. The only difference between the example you believe is just fine and the one I provided that you think is over the line is the fund company to which you send your check. That is illogical, and potentially costly.

As I said, best of luck.
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Re: Tax loss harvesting - wash sale rule

Post by Nate79 » Fri Sep 14, 2018 2:21 pm

iceport wrote:
Fri Sep 14, 2018 1:21 pm
Nate79 wrote:
Fri Sep 14, 2018 9:56 am
I think the IRS originally got it right when they said two different mutual funds can not be substantially identical. They should have left that guidance in the documents and left it at that.

To broadly say to mutual funds that track the same index are substantially identical is false and we know this to be false. For those that actually read the case law review that was posted recently (I think in another thread) where it went thru the case law of SI for bonds there are clear examples that show how there could be examples of index funds tracking the same index that are not SI.

Consider these two examples:

1). Two S&P500 index funds but one has an ER of 0.04% and one has an ER of X% (let's say 0.5% or let's say 1%). There total returns are different. Are they SI?
2). Two S&P500 index funds, one pays their dividends quarterly and one pays dividends annually. Are they SI?
Wasn't that old guidance written before index funds were in common use?

Anyway, taking the letter of the law so far away from the spirit of the law in the two examples offered keeps me questioning why folks think they wrote the wash sale rules in the first place. If they wanted to close a tax haven for those holding the securities of the day — i.e. not mutual funds or ETFs — it wouldn't make sense to make it so easy to open it back up again.

This is a coupon-clipping interpretation of wash sales: Scan a free coupon at the cash register and you save money. Use your promo code and save. Exchange your losing index fund from Fund Company A for an index fund tracking exactly the same index from Fund Company B and, voila, with a few extra keystrokes the wash sale rules don't apply to you. (Except in the case of wash sales, there is no reason to promote tax avoidance.)

Maybe the 1921 equivalent would be if they let investors by-pass the wash sale rules by using one stock broker to sell the losing stock and a different stock broker to buy it back again.
No.
IRS publication 564, 2009. The spirit of the law was to prevent buying the exact same security to get a tax benefit. Did you read the case law review which was for bonds?

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Re: Tax loss harvesting - wash sale rule

Post by ivk5 » Fri Sep 14, 2018 2:27 pm

No amount of name calling is going to resolve the ambiguity here. It's just going to turn off those who might otherwise be interested in the topic - and might even contribute - if we could maintain a measure of civility and decorum... Frankly I'm astonished that such an arcane issue has (in this thread, though not in others in my memory) elicited so much ad hominem invective.

As has been said, it seems to me that this comes down to everyone making informed decisions that suit their respective risk appetite.

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