Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TLH

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Hulk
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Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TLH

Post by Hulk » Mon Oct 15, 2018 4:03 am

I just tax loss harvested for the first time. Bought some VTIAX in August (and 2 other times in 2018) and TLHed last week. Great. But I am unclear on the 30 day rule for a wash sale. It goes forwards and backwards, right? I was fine in my example, I hadn't purchased VTIAX in >30 days. But I am approaching a point where I plan to purchase every 2 weeks or every month in my Taxable account.

For those in the accumulation phase and purchasing more funds every month, how can you ever TLH? I can control what I do in the future avoid buying for 30 days after a TLH. But I cannot control what I did in the past, 30 days prior to a stock market decline. I basically have a simple 3 fund portfolio. If I am buying the same three funds every month, how can I ever TLH? Does your portfolio just get more and more complex with "highly correlated" but not "substantially identical" funds?

Also, and if so, do you try to revert back to your baseline 3 funds after 30 days or is there an advantage of having the same asset class divided among several highly correlated index funds.

livesoft
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by livesoft » Mon Oct 15, 2018 4:53 am

Just like this:
viewtopic.php?t=179414

Instead of investing every 2 weeks in the same 2 funds, you could offset the purchases, so that one investment was bought on the 1st of every month and the other investment was bought on the 15th of every month.

Also, there is no wash sale if you use the cost basis method of Specific Identification and sell the shares purchased that created the wash sale. A wash sale is not illegal and a good broker will take care of the accounting (the adjustment) for you as shown in the link I just put in this post.
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Cpadave
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by Cpadave » Mon Oct 15, 2018 8:00 am

Maybe this has been answered before, but do brokers report to IRS if for example you sell VOO (vanguard S&P and buy VTI Vanguard total stock or in more similar ETF, sell VTI and but ITOT ( Ishare total stock). In the second case I know that IRS would most likely treat it as similar but was wondering if brokers do actually report it as wash sale. In the first case, I think one can argue that those indexes are similar. Thanks for input

livesoft
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by livesoft » Mon Oct 15, 2018 9:09 am

Of course brokers report what you sell in a taxable account. That is what a 1099-B is.

Will brokers report a wash sale? I don't know for sure, but at least Vanguard will make adjustments if CUSIP are the same in the same account.
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Doc
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by Doc » Mon Oct 15, 2018 9:15 am

livesoft wrote:
Mon Oct 15, 2018 9:09 am
Of course brokers report what you sell in a taxable account. That is what a 1099-B is.

Will brokers report a wash sale? I don't know for sure, but at least Vanguard will make adjustments if CUSIP are the same in the same account.
As far as I know brokers are only obligated to report wash sales with the same cusip number in the same account. That does not relive the taxpayers's obligation to report.

Start here to educate yourself: https://fairmark.com/?s=wash+sale
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Cpadave
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by Cpadave » Mon Oct 15, 2018 9:18 am

Yes, I know brokers report sales on 1099B. And I know brokers will adj cost for sale of identical securities. My question was on specific on treating as wash sale on similar ETF such as VTI and ITOT. I found a good article on Forbes that says it is a grey area as whether these will be wash sale for tax purposes. I was just wondering if brokers take aggressive position on such treatment and adjust basis as wash sale.

I guess the other question is if it worth it do do tax harvesting of 30K on a 8.4M portfolio. There is a small brokers fee and potential of getting on wrong side of buy and sell price (bid/ask) by the time you execute the transaction. And an added concern will be IRS position. Obviously it is not worth it if brokers adjust cost basis on such sales and report to IRS.

livesoft
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by livesoft » Mon Oct 15, 2018 10:10 am

It would be interesting to know if the Forbes article you mentioned just made up their data or if the reporter actually has some research of brokerages and 1099-Bs that show adjustments from wash sales. I suspect it is probably just some anecdotal hand waving just like what happens here on bogleheads.org.

That is, I don't think answers to your questions exist. So just try it and please keep us informed about what happens. Thanks!
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MnD
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by MnD » Mon Oct 15, 2018 10:23 am

Cpadave wrote:
Mon Oct 15, 2018 8:00 am
Maybe this has been answered before, but do brokers report to IRS if for example you sell VOO (vanguard S&P and buy VTI Vanguard total stock or in more similar ETF, sell VTI and but ITOT ( Ishare total stock). In the second case I know that IRS would most likely treat it as similar but was wondering if brokers do actually report it as wash sale. In the first case, I think one can argue that those indexes are similar. Thanks for input
Buying/selling different mutual funds do not generate wash sales and most certainly will not be flagged as such by brokerages.
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iceport
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by iceport » Mon Oct 15, 2018 11:00 am

livesoft wrote:
Mon Oct 15, 2018 10:10 am
It would be interesting to know if the Forbes article you mentioned just made up their data or if the reporter actually has some research of brokerages and 1099-Bs that show adjustments from wash sales. I suspect it is probably just some anecdotal hand waving just like what happens here on bogleheads.org.
Actually, the Forbes article was probably addressing the question of whether the TLH exchange is a wash sale that must be reported by the investor, not whether it is a wash sale that must be reported by a brokerage. As Doc noted above, they are not the same reporting requirements. The responsibilities of the brokerage are narrower than those of the investor.

Here are a couple of explanations of the different rules for brokers and investors. (The first one is a Forbes article. 8-) )

From a CPA: Wash Sale Loss Adjustments Can Be A Big Tax Return Headache

From TD Ameritrade: Wash Sale Tax Rules
It’s certainly a lot to keep track of, which is why your broker helps you out with some of it. But there are limitations. The IRS gave taxpayers and brokers different rule books when calculating wash sales. Here are a few of the basic differences:

Image

Does it seem like the broker is held to less stringent standards than the average taxpayer? Keep in mind that your broker is not privy to all your accounts across multiple firms, the identity of your spouse and all of their accounts, nor does it know what companies you may control. That would be a logistical nightmare! Plus, the term “substantially identical” leaves quite a bit of room for interpretation. Therefore, brokers cannot realistically track all applicable transactions.
"Discipline matters more than allocation.” ─William Bernstein

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iceport
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by iceport » Mon Oct 15, 2018 11:10 am

Cpadave wrote:
Mon Oct 15, 2018 8:00 am
Maybe this has been answered before, but do brokers report to IRS if for example you sell VOO (vanguard S&P and buy VTI Vanguard total stock or in more similar ETF, sell VTI and but ITOT ( Ishare total stock). In the second case I know that IRS would most likely treat it as similar but was wondering if brokers do actually report it as wash sale. In the first case, I think one can argue that those indexes are similar. Thanks for input
We do *not* know how the IRS would treat the second case. There was a whole (somewhat contentious) thread on the subject:

Wash sale question- are ITOT and VTI Substantially Identical?
"Discipline matters more than allocation.” ─William Bernstein

Cpadave
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by Cpadave » Mon Oct 15, 2018 11:13 am

This was the Forbes article I was referring to. I have not had a chance to see if there is any case law on the subject matter.

https://www.forbes.com/sites/baldwin/20 ... afab2f72d7

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iceport
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by iceport » Mon Oct 15, 2018 11:21 am

Cpadave wrote:
Mon Oct 15, 2018 11:13 am
I have not had a chance to see if there is any case law on the subject matter.
This legal review might save you some time:

New Twists on an Old Plot: Investors Look to Avoid the Wash Sale Rule by Harvesting Tax Losses with Exchange-Traded Funds
"Discipline matters more than allocation.” ─William Bernstein

Cpadave
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by Cpadave » Mon Oct 15, 2018 11:26 am

Thank You. I will read it soon.

livesoft
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by livesoft » Mon Oct 15, 2018 12:32 pm

Cpadave wrote:
Mon Oct 15, 2018 11:13 am
This was the Forbes article I was referring to. I have not had a chance to see if there is any case law on the subject matter.

https://www.forbes.com/sites/baldwin/20 ... afab2f72d7
Unfortunately, this article repeats the untruth
The IRS “wash sale” rule forbids you to deduct a loss on stock you buy back within 30 days.
'The IRS "wash sale" rule' certainly DOES NOT 'forbids you to deduct a loss on stock you buy back within 30 days.' But you cannot keep the stock that created the wash sale. You must sell the stock. One must understand how to spot a wash sale, how to treat it on one's tax return, how to defer the loss, and how to book the loss.

I see that most people stopping reading the IRS Publication 550 and other articles when they see the statement I quoted.
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White Coat Investor
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Re: Is your Taxable account crowed with "highly correlated" but not "substantially identical' funds? how else can you TL

Post by White Coat Investor » Mon Oct 15, 2018 12:37 pm

livesoft wrote:
Mon Oct 15, 2018 12:32 pm
Cpadave wrote:
Mon Oct 15, 2018 11:13 am
This was the Forbes article I was referring to. I have not had a chance to see if there is any case law on the subject matter.

https://www.forbes.com/sites/baldwin/20 ... afab2f72d7
Unfortunately, this article repeats the untruth
The IRS “wash sale” rule forbids you to deduct a loss on stock you buy back within 30 days.
'The IRS "wash sale" rule' certainly DOES NOT 'forbids you to deduct a loss on stock you buy back within 30 days.' But you cannot keep the stock that created the wash sale. You must sell the stock. One must understand how to spot a wash sale, how to treat it on one's tax return, how to defer the loss, and how to book the loss.

I see that most people stopping reading the IRS Publication 550 and other articles when they see the statement I quoted.
Exactly. It's okay to have bought the stock/etf/fund last week as long as you sell it this week. What you can't do is buy 10 shares two weeks ago, buy 10 shares last week, and then only sell the 10 shares you bought two weeks ago and claim a loss on them. As long as you sell all 20, you're fine.
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