Tax Loss Harvesting Worth it?

[iceport]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

[H-Town]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

IRS Rev Ruling 2008-5 states that the wash sale rules will apply when an individual sells a stock at a loss and buys the same stock in an IRA or Roth IRA within 30 days before or after the sale.

401k / employer benefit plan is left out. So I'm assuming that we were talking about using 401k.

[iceport]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

IRS Rev Ruling 2008-5 states that the wash sale rules will apply when an individual sells a stock at a loss and buys the same stock in an IRA or Roth IRA within 30 days before or after the sale.

401k / employer benefit plan is left out. So I'm assuming that we were talking about using 401k.

That's one assumption. But Doc didn't exclude IRAs, so I assumed that wasn't his focus.

[Doc]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

I think we are word nit picking. The point I was trying to make is that if you buy the replacement fund in tax advantaged you can easily avoid the "substantially identical" criteria by choosing a clearly not substantially identical fund since you only have to hold that fund for 30 days. As I said the last time I actually did this I replaced a small cap fund with a large cap fund. That clearly makes the substantially identical problem irrelevant.

[iceport]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

I think we are word nit picking. The point I was trying to make is that if you buy the replacement fund in tax advantaged you can easily avoid the "substantially identical" criteria by choosing a clearly not substantially identical fund since you only have to hold that fund for 30 days. As I said the last time I actually did this I replaced a small cap fund with a large cap fund. That clearly makes the substantially identical problem irrelevant.

But it's only irrelevant because you took care to comply with the requirement! If it were truly irrelevant, you wouldn't need to comply with the requirement, and could swap identical funds. I know that's not what you mean, and I agree, this is largely semantic and not worth arguing over.

Oh — I also agree with you that swapping substantially identical funds is move that is easily avoided.

[rkhusky]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

IRS Rev Ruling 2008-5 states that the wash sale rules will apply when an individual sells a stock at a loss and buys the same stock in an IRA or Roth IRA within 30 days before or after the sale.

401k / employer benefit plan is left out. So I'm assuming that we were talking about using 401k.

RR 2008-5 only dealt with IRA's and specifically said not to read anything further into it. The fact that 401k's and the like were not mentioned provides no information on how the IRS views wash sales and 401k's.

[H-Town]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

IRS Rev Ruling 2008-5 states that the wash sale rules will apply when an individual sells a stock at a loss and buys the same stock in an IRA or Roth IRA within 30 days before or after the sale.

401k / employer benefit plan is left out. So I'm assuming that we were talking about using 401k.

RR 2008-5 only dealt with IRA's and specifically said not to read anything further into it. The fact that 401k's and the like were not mentioned provides no information on how the IRS views wash sales and 401k's.

That's true. If we follow the intention of the Code, the same should be applied to 401k and employer sponsored plan.

[placeholder]

RR 2008-5 only dealt with IRA's and specifically said not to read anything further into it. The fact that 401k's and the like were not mentioned provides no information on how the IRS views wash sales and 401k's.

Here you can read a counter opinion:

viewtopic.php?f=1&t=264203#p4225913

[placeholder]

That's true. If we follow the intention of the Code, the same should be applied to 401k and employer sponsored plan.

If that was the intention of the code why was the ruling so narrow when it could have been broader and said any retirement account?

[rkhusky]

RR 2008-5 only dealt with IRA's and specifically said not to read anything further into it. The fact that 401k's and the like were not mentioned provides no information on how the IRS views wash sales and 401k's.

Here you can read a counter opinion:

viewtopic.php?f=1&t=264203#p4225913

That is just conjecture. The Revenue Ruling did not change the law, it just provided clarification that tax-deferred accounts are subject to wash sales even though the disallowed losses there can never be recovered.

[placeholder]

That is just conjecture. The Revenue Ruling did not change the law, it just provided clarification that tax-deferred accounts are subject to wash sales even though the disallowed losses there can never be recovered.

I think that anyone who reads the referenced quote and others from the same person will see that he spent a lot of time researching and put together a very coherent argument as to why your position of "hidden rules" is not likely to be correct based on the way the IRS handled this ruling and other similar ones.

[fortyofforty]

Is not all of this just conjecture? Unless and until someone is actually penalized for using two investments that the IRS decides are substantially identical, we are all just feeling our way through an imprecise tax code.

[Bacchus01]

Lastly, is TLH worth it? I'm in the 15% capital gains bracket. It's my understanding that TLH defers taxes to the future due to a lower cost basis on the shares sold and then bought. Does this mean that each year I take the full TLH benefit it's like contributing $3000 to a tax-deferred account?

Run the calculation through excel and you'll have your answer.

Not only you offset any capital gain in current year, but you will also be able to take $3k deduction to your AGI. It's like the IRS gives you interest free loan, with a possibility of not having to pay back the principal altogether.

The $3k against AGI is worth much more than the cap gains offset in % terms and cumulative effect is pretty decent, albeit not much in the scheme of a very large portfolio.

But for me, taking a few minutes a few times a year to gain a $1k+ tax deduction is worth it.

And it’s kinda fun. Makes me feel like I’m actually doing something other than “set and forget.” If I can somehow squeak out even a small gain over S&P or TSM, then I’m Superman!

[Greenman72]

That's true. If we follow the intention of the Code, the same should be applied to 401k and employer sponsored plan.

If that was the intention of the code why was the ruling so narrow when it could have been broader and said any retirement account?

In ten years of practicing public accountancy and dealing with the IRS, I have never seen them talk about the "intent" of the code. I have never been successful in getting them to back off of an audit because of the "intent" of the code.

Do not try to interpret the "intent" of Internal Revenue Code. I think you'll just drive yourself crazy.

[rkhusky]

That is just conjecture. The Revenue Ruling did not change the law, it just provided clarification that tax-deferred accounts are subject to wash sales even though the disallowed losses there can never be recovered.

I think that anyone who reads the referenced quote and others from the same person will see that he spent a lot of time researching and put together a very coherent argument as to why your position of "hidden rules" is not likely to be correct based on the way the IRS handled this ruling and other similar ones.

There are no "hidden rules". The wash sale statute (26 USC § 1091) is quite clear (other than the definition of substantially identical) on what constitutes a wash sale. The only exception is for taxpayers who are dealers in stocks and who make what would be a wash sale transaction in the course of their business. None of the IRS rulings have exempted other types of taxpayers or any type of account.

[Cycle]

I've been stuck in higher ER funds since last December as a result of a very well timed tlh.

I've been praying for a big dip ever since.

[Cycle]

^ I'm *not* OK with being stuck in a less desirable fund. As I noted, that's a worthwhile feature of the technique you described. I'm just saying the "substantially identical" test still applies; your technique does *not* make it irrelevant.

I of course only came to this realization after being stuck in such higher ER funds.

Not worth it to me. if u highly value a specific fund, probably not worth it to you.

If we don't get a nice big drop, I may just pay the piper when it goes long term cap gains in December and move that money over to a 529.

[AlwaysaQ]

One year I was able to use TLH to keep from being thrown into the next Medicare tier. Last year I did TLH for the same reason but I failed by a small amount. This year I am watching my losses for the same reason.

I look on my stocks and stock funds as my legacy to my heirs; It's possible I will never have to sell them for my expenses.

[placeholder]

There are no "hidden rules". The wash sale statute (26 USC § 1091) is quite clear (other than the definition of substantially identical) on what constitutes a wash sale. The only exception is for taxpayers who are dealers in stocks and who make what would be a wash sale transaction in the course of their business. None of the IRS rulings have exempted other types of taxpayers or any type of account.

What you say makes no sense because then the IRS wouldn't have needed a narrow ruling to just apply wash sales to IRAs so the fact that they did and changed the pubs is a strong indication that they didn't intend to include 401k and similar accounts or they would have worded it that way in the first place.

[rkhusky]

There are no "hidden rules". The wash sale statute (26 USC § 1091) is quite clear (other than the definition of substantially identical) on what constitutes a wash sale. The only exception is for taxpayers who are dealers in stocks and who make what would be a wash sale transaction in the course of their business. None of the IRS rulings have exempted other types of taxpayers or any type of account.

What you say makes no sense because then the IRS wouldn't have needed a narrow ruling to just apply wash sales to IRAs so the fact that they did and changed the pubs is a strong indication that they didn't intend to include 401k and similar accounts or they would have worded it that way in the first place.

The IRS specifically stated not to read anything further into the ruling than what was stated, presciently anticipating arguments such as you are making. The IRS is free to issue a narrow ruling on a broad statute, without simultaneously legalizing everything else outside their ruling.

[pdavi21]

I am not advocating anything illegal, but...

has the IRS ever enforced the wash-sale rule in retirement accounts or with very similar mutual funds?

[placeholder]

The IRS specifically stated not to read anything further into the ruling than what was stated, presciently anticipating arguments such as you are making. The IRS is free to issue a narrow ruling on a broad statute, without simultaneously legalizing everything else outside their ruling.

You are the one doing that because you are applying the reasoning from the ruling to other types of accounts as if all these accounts were covered the ruling would be unnecessary.

[fortyofforty]

In the end, as with many aspects of society, these rules must be interpreted and followed according to what is written, and what we believe was intended. Not everything in life is spelled out word for word. I think this is one of those cases. I believe the intention of the tax code is not to allow investors to take paper losses in investments without actually changing the profile of their investment accounts. I think that interpretation, to my mind, is fair both to me and to those collecting taxes. I consider it a very small sacrifice to have to select investment vehicles that track different indices in order to realize losses for tax purposes. Everyone doesn't see things the same way, of course, so best of luck to each of you in this uncertain matter.

As a thought experiment, would anyone be fine tax loss harvesting between three ETFs that follow the S&P 500 index, called S&P500a, S&P500b and S&P500c? How about three other ETFs, S&P499, S&P500 and S&P501?

[placeholder]

As a thought experiment, would anyone be fine tax loss harvesting between three ETFs that follow the S&P 500 index, called S&P500a, S&P500b and S&P500c? How about three other ETFs, S&P499, S&P500 and S&P501?

This guy didn't have any concerns with IVV and VOO:

viewtopic.php?f=10&t=252594&newpost=3992815#p3992815

[fortyofforty]

As a thought experiment, would anyone be fine tax loss harvesting between three ETFs that follow the S&P 500 index, called S&P500a, S&P500b and S&P500c? How about three other ETFs, S&P499, S&P500 and S&P501?

This guy didn't have any concerns with IVV and VOO:

viewtopic.php?f=10&t=252594&newpost=3992815#p3992815

"This guy" is also quite familiar with--and expert at dealing with--wash sale rules.

[rkhusky]

I am not advocating anything illegal, but...

has the IRS ever enforced the wash-sale rule in retirement accounts or with very similar mutual funds?

Haven't seen any published reports on it. But also none for wash sales between different brokerages or between spouse's accounts.

[rkhusky]

The IRS specifically stated not to read anything further into the ruling than what was stated, presciently anticipating arguments such as you are making. The IRS is free to issue a narrow ruling on a broad statute, without simultaneously legalizing everything else outside their ruling.

You are the one doing that because you are applying the reasoning from the ruling to other types of accounts as if all these accounts were covered the ruling would be unnecessary.

Not at all. The ruling only applies to IRA's. Note that the IRS does not make the law or change the law. So, the wash sale statute applied to IRA'a before the ruling, as well as after it. The wash sale rule applied to trusts, both before the IRS ruling on trusts, as well as after it. So, the IRS ruling on IRA's has nothing to do with whether or not 401k's are subject to wash sale rules. Only the wash sale statute determines whether 401k's are subject to wash sales and there is no exemption for 401k's in the statute.

[Greenman72]

https://www.google.com/amp/s/www.market ... 2128040CF6

Read this (admittedly dated) article and tell me if IVV, VOO, and SPY are “substantially identical “.

[placeholder]

"This guy" is also quite familiar with--and expert at dealing with--wash sale rules.

He is knowledgeable about many things.

[placeholder]

Not at all. The ruling only applies to IRA's. Note that the IRS does not make the law or change the law. So, the wash sale statute applied to IRA'a before the ruling, as well as after it. The wash sale rule applied to trusts, both before the IRS ruling on trusts, as well as after it. So, the IRS ruling on IRA's has nothing to do with whether or not 401k's are subject to wash sale rules. Only the wash sale statute determines whether 401k's are subject to wash sales and there is no exemption for 401k's in the statute.

What is your evidence that it to applied to IRAs before the ruling and what was the purpose of the revenue ruling if the regulations already included IRAs?

[rkhusky]

Not at all. The ruling only applies to IRA's. Note that the IRS does not make the law or change the law. So, the wash sale statute applied to IRA'a before the ruling, as well as after it. The wash sale rule applied to trusts, both before the IRS ruling on trusts, as well as after it. So, the IRS ruling on IRA's has nothing to do with whether or not 401k's are subject to wash sale rules. Only the wash sale statute determines whether 401k's are subject to wash sales and there is no exemption for 401k's in the statute.

What is your evidence that it to applied to IRAs before the ruling and what was the purpose of the revenue ruling if the regulations already included IRAs?

Because the IRS does not make the law. Congress makes the law. The IRS provides clarification of the statutes through their rulings. Obviously there were a lot of misconceptions and misinformation about the wash sale statute concerning trusts, and then about tax-advantaged accounts, such that the IRS felt the need to step in and clarify things. Some people can be quite aggressive about finding (or inventing) loopholes in the tax law.

[placeholder]

Because the IRS does not make the law. Congress makes the law.

You're evading the question because if the intent of the ruling was to clarify that all retirement trusts were included it would have said so but it didn't it narrowly addressed IRAs and changed the regulations/pubs to match so nothing that you say jibes with reality.

[iceport]

I still don't get what all the fuss is about.

For passive (index fund) investors, violating the spirit of the wash sale rule while complying with the widely accepted interpretation of the letter of the law is child's play. It's really quite simple. You find another fund that tracks a different index that is close enough to be practically indistinguishable in performance. You get to claim a loss while staying invested.

Letter of the law followed, spirit quite effectively violated.

But that's not enough for some folks? You feel the need to risk violating the letter of the also? Why? A sense of adventure? An attitude that you should be able to claim a loss with absolutely no change whatsoever in your financial position? You shouldn't even have to pretend you've made a change?

Baffling...

[placeholder]

But that's not enough for some folks? You feel the need to risk violating the letter of the also? Why? A sense of adventure? An attitude that you should be able to claim a loss with absolutely no change whatsoever in your financial position? You shouldn't even have to pretend you've made a change?

In the case of 401ks you might not have those choices which is one of the several reasons that many think such accounts don't participate in wash sales.

[Greenman72]

Letter of the law followed, spirit quite effectively violated.

But that's not enough for some folks? You feel the need to risk violating the letter of the also? Why? A sense of adventure? An attitude that you should be able to claim a loss with absolutely no change whatsoever in your financial position? You shouldn't even have to pretend you've made a change?

@Iceport - Having practiced public accountancy for ten years, I assure you that there is no "spirit of the law". There is only the letter. And you either follow it or you don't. And the only way you know if you followed it is after you get audited and either win or lose. It really is that simple.

I have told you my interpretation of "substantially identical" and how I use it in practice. If you want to hold yourself to some different and supposedly holier standard, then you have my blessing. Just don't make that standard binding on me, especially when the IRS itself has issued no guidance on the matter.

[H-Town]

Because the IRS does not make the law. Congress makes the law.

You're evading the question because if the intent of the ruling was to clarify that all retirement trusts were included it would have said so but it didn't it narrowly addressed IRAs and changed the regulations/pubs to match so nothing that you say jibes with reality.

You're aggressive for no reason. rkhusky is correct. The Tax Code is the primary authority. It's written by legislative branch. The IRS is the executive branch. Taxpayers can take IRS to the Tax court (and vice versa) for any disagreement on reading the Tax Code.

[iceport]

Letter of the law followed, spirit quite effectively violated.

But that's not enough for some folks? You feel the need to risk violating the letter of the also? Why? A sense of adventure? An attitude that you should be able to claim a loss with absolutely no change whatsoever in your financial position? You shouldn't even have to pretend you've made a change?

@Iceport - Having practiced public accountancy for ten years, I assure you that there is no "spirit of the law". There is only the letter. And you either follow it or you don't. And the only way you know if you followed it is after you get audited and either win or lose. It really is that simple.

I have told you my interpretation of "substantially identical" and how I use it in practice. If you want to hold yourself to some different and supposedly holier standard, then you have my blessing. Just don't make that standard binding on me, especially when the IRS itself has issued no guidance on the matter.

Apparently, finding a different index with practically the same performance is too difficult for you. So far, it's been pretty easy for me, and I'm not even a financial services professional.

[placeholder]

You're aggressive for no reason. rkhusky is correct. The Tax Code is the primary authority. It's written by legislative branch. The IRS is the executive branch. Taxpayers can take IRS to the Tax court (and vice versa) for any disagreement on reading the Tax Code.

No one said otherwise especially me but what is at issue is the interpretation of the law and purpose of the revenue ruling which is to explain the IRS regulations (based on the law/IRS research/court case results) and the fact that the ruling mentioned only IRAs AND said not to draw any other conclusions.

[placeholder]

Apparently, finding a different index with practically the same performance is too difficult for you. So far, it's been pretty easy for me, and I'm not even a financial services professional.

No one least of all the IRS has ever said anything about indexes being the determiner.

[iceport]

Letter of the law followed, spirit quite effectively violated.

But that's not enough for some folks? You feel the need to risk violating the letter of the also? Why? A sense of adventure? An attitude that you should be able to claim a loss with absolutely no change whatsoever in your financial position? You shouldn't even have to pretend you've made a change?

@Iceport - Having practiced public accountancy for ten years, I assure you that there is no "spirit of the law". There is only the letter. And you either follow it or you don't. And the only way you know if you followed it is after you get audited and either win or lose. It really is that simple.

Rulings that interpret the letter of the law are informed by the intent of the law, commonly phrased the "spirit of the law." EDIT to add: In my humble opinion, an individual's attempt to interpret the letter of the law where that letter remains unclear should likewise be informed by the spirit of the law. Thankfully, it's a fairly simple concept.

Per I.R.S. Gen. Couns. Mem. 38,369 (May 9, 1980):

The "purpose of the wash sales provisions is to prevent tax manipulation by a taxpayer who
attempts to recognize a loss on the sale of 'securities' while maintaining an identical or nearly identical
investment position."

See Footnote 47 of this legal review:

New Twists on an Old Plot: Investors Look to Avoid the Wash Sale Rule by Harvesting Tax Losses with Exchange-Traded Funds

[H-Town]

Apparently, finding a different index with practically the same performance is too difficult for you. So far, it's been pretty easy for me, and I'm not even a financial services professional.

No one least of all the IRS has ever said anything about indexes being the determiner.

It's a conjecture. We don't know that for certain.

It's pretty clear to me that two funds track the same index are substantially identical. It would be a wash sale under Code Section 1091(a). Although it's only my opinion, there's a risk that the IRS has similar interpretation. And that's the risk that I would not expose myself to.

Solution? It's pretty simple: use a fund that track different index. It's just enough to change your financial position while taking a loss.

[H-Town]

Letter of the law followed, spirit quite effectively violated.

But that's not enough for some folks? You feel the need to risk violating the letter of the also? Why? A sense of adventure? An attitude that you should be able to claim a loss with absolutely no change whatsoever in your financial position? You shouldn't even have to pretend you've made a change?

@Iceport - Having practiced public accountancy for ten years, I assure you that there is no "spirit of the law". There is only the letter. And you either follow it or you don't. And the only way you know if you followed it is after you get audited and either win or lose. It really is that simple.

I have told you my interpretation of "substantially identical" and how I use it in practice. If you want to hold yourself to some different and supposedly holier standard, then you have my blessing. Just don't make that standard binding on me, especially when the IRS itself has issued no guidance on the matter.

Who going to pay the cost of dealing with IRS audit? Who going to pay back taxes? Your client, right?

Think about fiduciary duty as a tax practitioner. It's not really about you (or me) and who is right or wrong. When the subject matter is in the grey area, we just need to think about the potential cost and benefits for the client. Eliminate the grey area and eliminate the risk for your client.

[placeholder]

It's pretty clear to me that two funds track the same index are substantially identical. It would be a wash sale under Code Section 1091(a). Although it's only my opinion, there's a risk that the IRS has similar interpretation. And that's the risk that I would not expose myself to.

Solution? It's pretty simple: use a fund that track different index. It's just enough to change your financial position while taking a loss.

Once again I refer you to this guy and his reasoning on the topic:

viewtopic.php?t=278474#p4497399

You're acting as though it's a given that different indexes makes it safe when the IRS has said nothing of the sort.

[Doc]

Substantially Identical Securities

Mutual Funds

There’s some debate, but no direct authority, on the question of whether two mutual funds keying off the same index are substantially identical for purposes of the wash sale rule. Can you sell one S&P 500 index fund at a loss and buy a different S&P 500 fund the same day without having a wash sale?

Because there is no direct authority dealing with this question, reasonable minds may disagree.
...
The bottom line is that risk and the wash sale rule are tied together. If you have a strategy that completely eliminates risk from your sale and repurchase, it’s likely that you have a wash sale. You can’t report a loss for tax purposes without changing your investment position.

https://fairmark.com/investment-taxatio ... ecurities/

[Greenman72]

When the subject matter is in the grey area, we just need to think about the potential cost and benefits for the client. Eliminate the grey area, eliminate the risk, and eliminate all tax benefits for your client, ensuring that they lose more money in taxes than is necessary.

FTFY

[H-Town]

When the subject matter is in the grey area, we just need to think about the potential cost and benefits for the client. Eliminate the grey area, eliminate the risk, and eliminate all tax benefits for your client, ensuring that they lose more money in taxes than is necessary.

FTFY

There's tax planning opportunities for you. Sit down with your clients and build a roster of ETF / funds that can be used for TLH without exposing risk of loss being disallowed. It would add a lot of value and might open door for other consulting work.

[iceport]

When the subject matter is in the grey area, we just need to think about the potential cost and benefits for the client. Eliminate the grey area, eliminate the risk, and eliminate all tax benefits for your client, ensuring that they lose more money in taxes than is necessary.

FTFY

There's tax planning opportunities for you. Sit down with your clients and build a roster of ETF / funds that can be used for TLH without exposing risk of loss being disallowed. It would add a lot of value and might open door for other consulting work.

It appears that finding a similar but not identical index to track is an insurmountable task for some — thus the false choice inferred above.

[placeholder]

It's amazing how concerned people are about wash sales when (based on history) you're more likely to be hit by a meteor than have a wash between different funds and much more likely to get debris fly in through your windshield on the highway and kill you.

[rkhusky]

You're aggressive for no reason. rkhusky is correct. The Tax Code is the primary authority. It's written by legislative branch. The IRS is the executive branch. Taxpayers can take IRS to the Tax court (and vice versa) for any disagreement on reading the Tax Code.

No one said otherwise especially me but what is at issue is the interpretation of the law and purpose of the revenue ruling which is to explain the IRS regulations (based on the law/IRS research/court case results) and the fact that the ruling mentioned only IRAs AND said not to draw any other conclusions.

Since the IRS does not make or change the law, if IRA’s are now subject to the wash sale statute, they always have been.

[placeholder]

Since the IRS does not make or change the law, if IRA’s are now subject to the wash sale statute, they always have been.

That's like saying that it was always the case that you could only do just one 60 day rollover per 12 month period yet that did represent a very real change in regulations which is also the case for IRAs (and not for 401ks).