Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

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boglefan90
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Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by boglefan90 » Mon Mar 02, 2020 9:21 pm

Let's say you sell VGT (Vanguard Information Technology ETF) for a loss and then, within 30 days, buy AAPL (the biggest component of VGT at around 18% of assets).

Would this be considered a wash sale?

Thank you for the help

rkhusky
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by rkhusky » Mon Mar 02, 2020 9:50 pm

No wash sale. Not substantially identical.

alex_686
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by alex_686 » Mon Mar 02, 2020 9:54 pm

rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.

rkhusky
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by rkhusky » Mon Mar 02, 2020 9:58 pm

alex_686 wrote:
Mon Mar 02, 2020 9:54 pm
rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.
AAPL is identical to VGT? How so?

Since 2010, AAPL and VGT have a 72% correlation. I'm not even sure you could call them very similar.
Last edited by rkhusky on Mon Mar 02, 2020 10:01 pm, edited 1 time in total.

ruud
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by ruud » Mon Mar 02, 2020 9:59 pm

alex_686 wrote:
Mon Mar 02, 2020 9:54 pm
rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.
Where is the cut off? If AAPL is substantially identical to VGT, is it substantially identical to VTI as well since it is the largest holding in there too?
.

alex_686
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by alex_686 » Mon Mar 02, 2020 10:11 pm

rkhusky wrote:
Mon Mar 02, 2020 9:58 pm
alex_686 wrote:
Mon Mar 02, 2020 9:54 pm
rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.
AAPL is identical to VGT? How so?

Since 2010, AAPL and VGT have a 72% correlation. I'm not even sure you could call them very similar.
Gosh, I have to retract. You are right.

I misread that the OP was selling a fund and buying the underlying funds. That us a absolutely dodge. The rule of thumb is 80% overlap.

I do apologize.

lgs88
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by lgs88 » Mon Mar 02, 2020 10:21 pm

alex_686 wrote:
Mon Mar 02, 2020 10:11 pm

Gosh, I have to retract. You are right.

I misread that the OP was selling a fund and buying the underlying funds. That us a absolutely dodge. The rule of thumb is 80% overlap.

I do apologize.
Alex_686,

You appear knowledgeable on a topic that's unclear to many of us Bogleheads, having been a fund administrator.

Here are some US stock tax-loss harvest partners. Let me know what you think of them.

ITOT (US Total Stock Market, index S&P Total Market Index)
IVV (S&P 500)
VV (Vanguard Large-Cap ETF, index CRSP Large Cap Index)

Would you be comfortable TLHing using these as partners, although there's obviously considerable overlap between the total market indices and the S&P 500 -- and even more overlap between the S&P 500 and the Vanguard Large-Cap Index? What about TLHing between Total Market funds that follow different indices (e.g. VTI and ITOT)?

lgs88
merely an interested amateur

MotoTrojan
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by MotoTrojan » Mon Mar 02, 2020 10:51 pm

lgs88 wrote:
Mon Mar 02, 2020 10:21 pm
alex_686 wrote:
Mon Mar 02, 2020 10:11 pm

Gosh, I have to retract. You are right.

I misread that the OP was selling a fund and buying the underlying funds. That us a absolutely dodge. The rule of thumb is 80% overlap.

I do apologize.
Alex_686,

You appear knowledgeable on a topic that's unclear to many of us Bogleheads, having been a fund administrator.

Here are some US stock tax-loss harvest partners. Let me know what you think of them.

ITOT (US Total Stock Market, index S&P Total Market Index)
IVV (S&P 500)
VV (Vanguard Large-Cap ETF, index CRSP Large Cap Index)

Would you be comfortable TLHing using these as partners, although there's obviously considerable overlap between the total market indices and the S&P 500 -- and even more overlap between the S&P 500 and the Vanguard Large-Cap Index? What about TLHing between Total Market funds that follow different indices (e.g. VTI and ITOT)?

lgs88
I’ve seen a poster on here openly swap IVV for VOO, an S&P500 to S&P500. Too far for me but I’ve done VTI for ITOT.

Honestly if the IRS ever hit me for that I’d be beyond excited to be the lucky person to announce as such on this forum, I’d be a legend. Same goes for anyone getting hit for a wash sale in a 401k (common belief that only IRAs are applicable on retirement account side).

AlohaJoe
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by AlohaJoe » Mon Mar 02, 2020 11:02 pm

MotoTrojan wrote:
Mon Mar 02, 2020 10:51 pm
I’ve seen a poster on here openly swap IVV for VOO, an S&P500 to S&P500. Too far for me but I’ve done VTI for ITOT.
Personally I think that even the (very common) Boglehead switch from the S&P 500 to Total Stock Market or from e.g. FTSE ex-US to S&P ex-US indices are breaking the rule. The rule is clearly intended to disallow "not taking risk". But the entire goal of a typical Boglehead tax loss harvest is to switch funds and "not take risk" by picking indexes that are virtually economically indistinguishable.

But I also don't think the IRS really cares or will ever investigate anyone about it. Even if you were audited, I doubt they'd mention it.

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anon_investor
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by anon_investor » Mon Mar 02, 2020 11:09 pm

alex_686 wrote:
Mon Mar 02, 2020 10:11 pm
rkhusky wrote:
Mon Mar 02, 2020 9:58 pm
alex_686 wrote:
Mon Mar 02, 2020 9:54 pm
rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.
AAPL is identical to VGT? How so?

Since 2010, AAPL and VGT have a 72% correlation. I'm not even sure you could call them very similar.
Gosh, I have to retract. You are right.

I misread that the OP was selling a fund and buying the underlying funds. That us a absolutely dodge. The rule of thumb is 80% overlap.

I do apologize.
Where does the 80% overlap rule of thumb come from?

justsomeguy2018
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by justsomeguy2018 » Mon Mar 02, 2020 11:37 pm

alex_686 wrote:
Mon Mar 02, 2020 10:11 pm
rkhusky wrote:
Mon Mar 02, 2020 9:58 pm
alex_686 wrote:
Mon Mar 02, 2020 9:54 pm
rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.
AAPL is identical to VGT? How so?

Since 2010, AAPL and VGT have a 72% correlation. I'm not even sure you could call them very similar.
Gosh, I have to retract. You are right.

I misread that the OP was selling a fund and buying the underlying funds. That us a absolutely dodge. The rule of thumb is 80% overlap.

I do apologize.
What if you sell an oil stock (XOM) then buy an oil ETF (XLE) that contains XOM?

Hank Moody
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by Hank Moody » Mon Mar 02, 2020 11:49 pm

alex_686 wrote:
Mon Mar 02, 2020 10:11 pm
rkhusky wrote:
Mon Mar 02, 2020 9:58 pm
alex_686 wrote:
Mon Mar 02, 2020 9:54 pm
rkhusky wrote:
Mon Mar 02, 2020 9:50 pm
No wash sale. Not substantially identical.
It’s absolutely identical. How is it economically different?

I used to be a fund accountant and the IRS suggested that we run these types of tests. 20 years ago sone accounting firms got nailed to the wall helping their clients do this sort of stuff.
AAPL is identical to VGT? How so?

Since 2010, AAPL and VGT have a 72% correlation. I'm not even sure you could call them very similar.
Gosh, I have to retract. You are right.

I misread that the OP was selling a fund and buying the underlying funds. That us a absolutely dodge. The rule of thumb is 80% overlap.

I do apologize.
Please explain where an 80% overlap identifies a wash sale. I will frequently engage in loss harvesting with funds that have much higher correlations but also have different characteristics. Examples include Total market sustainability for total market non-sustainability, or tax managed large value for non-tax managed large value, etc. You guys see issues here? If so, please point me to some written guidance.
-HM

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by Hank Moody » Mon Mar 02, 2020 11:50 pm

AlohaJoe wrote:
Mon Mar 02, 2020 11:02 pm
MotoTrojan wrote:
Mon Mar 02, 2020 10:51 pm
I’ve seen a poster on here openly swap IVV for VOO, an S&P500 to S&P500. Too far for me but I’ve done VTI for ITOT.
Personally I think that even the (very common) Boglehead switch from the S&P 500 to Total Stock Market or from e.g. FTSE ex-US to S&P ex-US indices are breaking the rule. The rule is clearly intended to disallow "not taking risk". But the entire goal of a typical Boglehead tax loss harvest is to switch funds and "not take risk" by picking indexes that are virtually economically indistinguishable.

But I also don't think the IRS really cares or will ever investigate anyone about it. Even if you were audited, I doubt they'd mention it.
In 40 years of preparing tax returns, I have never had this kind of thing looked it.
-HM

alex_686
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by alex_686 » Tue Mar 03, 2020 7:42 am

anon_investor wrote:
Mon Mar 02, 2020 11:09 pm
Where does the 80% overlap rule of thumb come from?
The IRS has never specifically said what they consider to be substantially similar. If you knew the exact rules you could game the system. Wash sales are like beauty - you know it when you see it.

But there have been cases. There are always big tax conferences with current and former IRS discussing the latest rule or tactics. 80% overlap seems to be the trigger.

Other than that I agree what has been said above. It is a technical issue when we get this far into the weeds. I read about some big judgements when millions are on the line, never heard one about a small fry.

Gill
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by Gill » Tue Mar 03, 2020 7:47 am

alex_686 wrote:
Tue Mar 03, 2020 7:42 am
The IRS has never specifically said what they consider to be substantially similar.
The standard is “substantially identical “, not “similar”
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

alex_686
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by alex_686 » Tue Mar 03, 2020 7:59 am

Gill wrote:
Tue Mar 03, 2020 7:47 am
alex_686 wrote:
Tue Mar 03, 2020 7:42 am
The IRS has never specifically said what they consider to be substantially similar.
The standard is “substantially identical “, not “similar”
Gill
It’s early, I have not had my coffee yet. Good catch.

rkhusky
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by rkhusky » Tue Mar 03, 2020 8:04 am

alex_686 wrote:
Tue Mar 03, 2020 7:42 am
Other than that I agree what has been said above. It is a technical issue when we get this far into the weeds. I read about some big judgements when millions are on the line, never heard one about a small fry.
Would you provide some links to court cases that involved mutual funds? Some of us would like to read the details of the decisions.

alex_686
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by alex_686 » Tue Mar 03, 2020 8:11 am

rkhusky wrote:
Tue Mar 03, 2020 8:04 am
alex_686 wrote:
Tue Mar 03, 2020 7:42 am
Other than that I agree what has been said above. It is a technical issue when we get this far into the weeds. I read about some big judgements when millions are on the line, never heard one about a small fry.
Would you provide some links to court cases that involved mutual funds? Some of us would like to read the details of the decisions.
It has been 5 years since I left that job, and the cases are 20 years old. If I recall correctly, 3 of them made the WSJ front page. Or was it the front page of the Investment sectors? It was around when Enron was blowing up. It is kind of a dead issue because everybody in the space knows where the landmines are - and how few white collar cases are pursued.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by samsoes » Tue Mar 03, 2020 8:19 am

Folks, keep in mind that the words substantially identical means identical in substance.

If they are not identical in substance (made of the identical -- exact same -- stuff), they are not substantially identical.

There are only two words. Doesn't leave much room for interpretation.

(Just my 2 cents.)
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retiringwhen
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by retiringwhen » Tue Mar 03, 2020 8:34 am

Since livesoft is MIA, I will post the relevant IRS publication link. Read it and decide for yourself.
https://www.irs.gov/publications/p550#en_US_2018_publink100010601 wrote: Wash Sales
You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

Example 1.

You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050.

Example 2.

You are an employee of a corporation with an incentive pay plan. Under this plan, you are given 10 shares of the corporation's stock as a bonus award. You include the fair market value of the stock in your gross income as additional pay. You later sell these shares at a loss. If you receive another bonus award of substantially identical stock within 30 days of the sale, you cannot deduct your loss on the sale.

Options and futures contracts.
The wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities. They do not apply to losses from sales or trades of commodity futures contracts and foreign currencies. See Coordination of Loss Deferral Rules and Wash Sale Rules , later, for information about the tax treatment of losses on the disposition of positions in a straddle.

Securities futures contract to sell.
Losses from the sale, exchange, or termination of a securities futures contract to sell generally are treated in the same manner as losses from the closing of a short sale, discussed later in this section under Short sales .

Warrants.
The wash sale rules apply if you sell common stock at a loss and, at the same time, buy warrants for common stock of the same corporation. But if you sell warrants at a loss and, at the same time, buy common stock in the same corporation, the wash sale rules apply only if the warrants and stock are considered substantially identical, as discussed next.

Substantially identical. In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.
Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:

Is convertible into common stock,
Has the same voting rights as the common stock,
Is subject to the same dividend restrictions,
Trades at prices that do not vary significantly from the conversion ratio, and
Is unrestricted as to convertibility.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by AlohaJoe » Tue Mar 03, 2020 8:46 am

samsoes wrote:
Tue Mar 03, 2020 8:19 am
Folks, keep in mind that the words substantially identical means identical in substance.

If they are not identical in substance (made of the identical -- exact same -- stuff), they are not substantially identical.

There are only two words. Doesn't leave much room for interpretation.
Of course it does leave room for interpretation, as the the IRS publication clearly shows. It also clearly shows that "made of exact same stuff" is not what the IRS uses to evaluate a wash sale; I'm not sure what your claim is based on.

Sometimes bonds are "substantially identical" to stock, according to the IRS.

Sometimes preferred stock is "substantially identical" to common stock, according to the IRS.

Sometimes the stock of two different companies can be "substantially identical", according to the IRS.

No doubt, after decades of case law, there are even more edge cases.

I also don't think any of this matters for Boglehead investors.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by Thesaints » Tue Mar 03, 2020 1:21 pm

If the OP got audited, the IRS may very well make the case that 18% of the loss is subjected to the wash-sale rule. It would be not far fetched to claim that ownership of the ETF corresponds to ownership of the underlying basket.

On the other hand, the correct wash sale amount should be calculated taking only into account the value of Apple shares, not of the ETF shares.

However:
1) IRS would not bother except for very high wash sales amounts.
2) A possible defense line would be claiming that the ETF is not the same as the underlying basket, unless held in the quantities corresponding to a creation unit.

As such, small individual investors are safe. More interesting is the case of selling an ETF and buying the corresponding index fund. The jury is still out on this. There is still not a definitive IRS guidance. Again, small individual investors are probably safe.

Theabove does not constitute legal advice. Consult with your professional tax advisor.

lgs88
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by lgs88 » Tue Mar 03, 2020 3:02 pm

alex_686 wrote:
Tue Mar 03, 2020 8:11 am
rkhusky wrote:
Tue Mar 03, 2020 8:04 am
alex_686 wrote:
Tue Mar 03, 2020 7:42 am
Other than that I agree what has been said above. It is a technical issue when we get this far into the weeds. I read about some big judgements when millions are on the line, never heard one about a small fry.
Would you provide some links to court cases that involved mutual funds? Some of us would like to read the details of the decisions.
It has been 5 years since I left that job, and the cases are 20 years old. If I recall correctly, 3 of them made the WSJ front page. Or was it the front page of the Investment sectors? It was around when Enron was blowing up. It is kind of a dead issue because everybody in the space knows where the landmines are - and how few white collar cases are pursued.
I've now TLHed from ITOT (TSM) to IVV (S&P500 -- 508 stocks) to VV (Vanguard Large-Cap -- 583 stocks) within the past 10 days or so. Should this decline continue, I'll have to decide whether I'm willing to TLH into VTI (TSM, albeit a different index) and VOO (another S&P500). Each step has involved five figures of losses, so it'd be worth it to me to know for sure whether any of them will be disallowed.

Let's hope my market timing is never so poor again to put me in this jam!

lgs88
merely an interested amateur

retiringwhen
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by retiringwhen » Tue Mar 03, 2020 3:05 pm

lgs88 wrote:
Tue Mar 03, 2020 3:02 pm
alex_686 wrote:
Tue Mar 03, 2020 8:11 am
rkhusky wrote:
Tue Mar 03, 2020 8:04 am
alex_686 wrote:
Tue Mar 03, 2020 7:42 am
Other than that I agree what has been said above. It is a technical issue when we get this far into the weeds. I read about some big judgements when millions are on the line, never heard one about a small fry.
Would you provide some links to court cases that involved mutual funds? Some of us would like to read the details of the decisions.
It has been 5 years since I left that job, and the cases are 20 years old. If I recall correctly, 3 of them made the WSJ front page. Or was it the front page of the Investment sectors? It was around when Enron was blowing up. It is kind of a dead issue because everybody in the space knows where the landmines are - and how few white collar cases are pursued.
I've now TLHed from ITOT (TSM) to IVV (S&P500 -- 508 stocks) to VV (Vanguard Large-Cap -- 583 stocks) within the past 10 days or so. Should this decline continue, I'll have to decide whether I'm willing to TLH into VTI (TSM, albeit a different index) and VOO (another S&P500). Each step has involved five figures of losses, so it'd be worth it to me to know for sure whether any of them will be disallowed.

Let's hope my market timing is never so poor again to put me in this jam!

lgs88
I did this round trip 3 1/2 times in 2018, know the feeling.

I have VOO equivalent in my 401(K) so I avoided it. Instead for US stocks within Vanguard only I rotated among:

VTI -> VV / VB -> VIGAX / VVIAX / VB.

I also considered VBR instead of VB, but did not have to take the move. Make lemonade while you have lemons.

lgs88
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by lgs88 » Tue Mar 03, 2020 3:55 pm

retiringwhen wrote:
Tue Mar 03, 2020 3:05 pm
I did this round trip 3 1/2 times in 2018, know the feeling.

I have VOO equivalent in my 401(K) so I avoided it. Instead for US stocks within Vanguard only I rotated among:

VTI -> VV / VB -> VIGAX / VVIAX / VB.

I also considered VBR instead of VB, but did not have to take the move. Make lemonade while you have lemons.
Thanks, retiringwhen.

The other possibility I considered was picking an actively managed fund -- preferably a "closet index" with a low ER. I haven't managed to identify any, though, particularly not in ETF form.
merely an interested amateur

retiringwhen
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by retiringwhen » Tue Mar 03, 2020 4:14 pm

lgs88 wrote:
Tue Mar 03, 2020 3:55 pm
retiringwhen wrote:
Tue Mar 03, 2020 3:05 pm
I did this round trip 3 1/2 times in 2018, know the feeling.

I have VOO equivalent in my 401(K) so I avoided it. Instead for US stocks within Vanguard only I rotated among:

VTI -> VV / VB -> VIGAX / VVIAX / VB.

I also considered VBR instead of VB, but did not have to take the move. Make lemonade while you have lemons.
Thanks, retiringwhen.

The other possibility I considered was picking an actively managed fund -- preferably a "closet index" with a low ER. I haven't managed to identify any, though, particularly not in ETF form.
There are almost no Active Mutual Funds that are listed as ETFs. BTW, if you can do VOO/VXF, that gives you a pretty decent table of funds to move through just at Vanguard.

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anon_investor
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by anon_investor » Tue Mar 03, 2020 7:40 pm

retiringwhen wrote:
Tue Mar 03, 2020 3:05 pm
lgs88 wrote:
Tue Mar 03, 2020 3:02 pm
alex_686 wrote:
Tue Mar 03, 2020 8:11 am
rkhusky wrote:
Tue Mar 03, 2020 8:04 am
alex_686 wrote:
Tue Mar 03, 2020 7:42 am
Other than that I agree what has been said above. It is a technical issue when we get this far into the weeds. I read about some big judgements when millions are on the line, never heard one about a small fry.
Would you provide some links to court cases that involved mutual funds? Some of us would like to read the details of the decisions.
It has been 5 years since I left that job, and the cases are 20 years old. If I recall correctly, 3 of them made the WSJ front page. Or was it the front page of the Investment sectors? It was around when Enron was blowing up. It is kind of a dead issue because everybody in the space knows where the landmines are - and how few white collar cases are pursued.
I've now TLHed from ITOT (TSM) to IVV (S&P500 -- 508 stocks) to VV (Vanguard Large-Cap -- 583 stocks) within the past 10 days or so. Should this decline continue, I'll have to decide whether I'm willing to TLH into VTI (TSM, albeit a different index) and VOO (another S&P500). Each step has involved five figures of losses, so it'd be worth it to me to know for sure whether any of them will be disallowed.

Let's hope my market timing is never so poor again to put me in this jam!

lgs88
I did this round trip 3 1/2 times in 2018, know the feeling.

I have VOO equivalent in my 401(K) so I avoided it. Instead for US stocks within Vanguard only I rotated among:

VTI -> VV / VB -> VIGAX / VVIAX / VB.

I also considered VBR instead of VB, but did not have to take the move. Make lemonade while you have lemons.
The IRS has only officially said that IRAs are implicated in a wash sale. Nothing definitive for 401ks...

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by stan1 » Tue Mar 03, 2020 7:57 pm

There have been multiple S&P 500 index funds available to retail investors for more than 30 years. Vanguard Index 500 started in 1976 and Fidelity 500 started in 1988 to name two of the highest visibility retail S&P 500 funds.

How many years must we wait for the IRS to declare different S&P 500 index funds to be substantially identical? What if they never do? If IRS has had 30 plus years to do something about it and haven't done so I have to conclude they are OK with it, or it isn't worth their time.

I am quite comfortable tax loss harvesting between two funds/ETFs that use the same index. Where I draw the line is between share classes, because I can convert mutual fund share classes to ETF share classes as a non-taxable event. If new information emerges I will conform going forward but I don't see the point of wringing my hands the rest of my life over whether the IRS is going to disallow my wash sale.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by Thesaints » Tue Mar 03, 2020 8:00 pm

The IRS has limited energies and, with few exceptions, goes after the juicyest morsels only.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by rkhusky » Tue Mar 03, 2020 8:33 pm

anon_investor wrote:
Tue Mar 03, 2020 7:40 pm
retiringwhen wrote:
Tue Mar 03, 2020 3:05 pm
I did this round trip 3 1/2 times in 2018, know the feeling.

I have VOO equivalent in my 401(K) so I avoided it. Instead for US stocks within Vanguard only I rotated among:

VTI -> VV / VB -> VIGAX / VVIAX / VB.

I also considered VBR instead of VB, but did not have to take the move. Make lemonade while you have lemons.
The IRS has only officially said that IRAs are implicated in a wash sale. Nothing definitive for 401ks...
The wash sale statute does not mention any particular account types, just that there is a wash sale if the taxpayer has acquired substantially identical stock or securities within the wash sale window. Over the years, the IRS has specifically clarified that the statute applies to your spouse's accounts, corporations that you control, your trusts, and your IRA's. The IRS has not exempted any account type.

It is true that the IRS has been silent on whether 401k's or 403b's or the like are specifically included or excluded. But, absent a specific ruling exempting 401k's, the taxpayer should assume they are included in the statute. Particularly, since there is a Supreme Court ruling that taxpayers cannot take deductions unless specifically allowed by statute or government regulation. Note that this is opposite to saying that unless a statute or government regulation specifically prohibits a deduction, you are permitted to take it.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by TropikThunder » Tue Mar 03, 2020 8:42 pm

retiringwhen wrote:
Tue Mar 03, 2020 8:34 am
Since livesoft is MIA, I will post the relevant IRS publication link. Read it and decide for yourself.
https://www.irs.gov/publications/p550#en_US_2018_publink100010601 wrote: Wash Sales

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Does the bolded section mean you can't TLH a fund you have owned for less than 30 days? If I buy VTSAX on Feb 24th and sell it at a loss on Mar 3rd, then I have obviously bought a "substantially identical stock or securities" (truly identical in this case) "within 30 days before or after the sale". Isn't that why people advise turning off dividend reinvestment? If this is a problem, what about someone who, for example:
lgs88 wrote:
Tue Mar 03, 2020 3:02 pm
TLHed from ITOT (TSM) to IVV (S&P500 -- 508 stocks) to VV (Vanguard Large-Cap -- 583 stocks) within the past 10 days or so.
Or is it OK if you sell your whole position so that the shares purchased within the 30 day window are sold as well. Asking for a friend. :P

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by lgs88 » Tue Mar 03, 2020 8:49 pm

TropikThunder wrote:
Tue Mar 03, 2020 8:42 pm
retiringwhen wrote:
Tue Mar 03, 2020 8:34 am
Since livesoft is MIA, I will post the relevant IRS publication link. Read it and decide for yourself.
https://www.irs.gov/publications/p550#en_US_2018_publink100010601 wrote: Wash Sales

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Does the bolded section mean you can't TLH a fund you have owned for less than 30 days? If I buy VTSAX on Feb 24th and sell it at a loss on Mar 3rd, then I have obviously bought a "substantially identical stock or securities" (truly identical in this case) "within 30 days before or after the sale". Isn't that why people advise turning off dividend reinvestment? If this is a problem, what about someone who, for example:
lgs88 wrote:
Tue Mar 03, 2020 3:02 pm
TLHed from ITOT (TSM) to IVV (S&P500 -- 508 stocks) to VV (Vanguard Large-Cap -- 583 stocks) within the past 10 days or so.
Or is it OK if you sell your whole position so that the shares purchased within the 30 day window are sold as well. Asking for a friend. :P
TropikThunder,

Gosh, I hope not!

As I understand it, the prohibition is against selling a position with a loss and then buying a substantially identical position. I do not believe that it is prohibited to book a loss on a position held for less than 30 days, which is -- I believe -- what you're suggesting. The day traders would be in trouble!

What I could not do is the following:

Own $100,000 of VTSAX with a capital loss
Buy $100,000 of VTSAX
Sell the $100,000 of VTSAX with a capital loss
Book that loss for tax purposes

lgs88
merely an interested amateur

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by ruud » Tue Mar 03, 2020 9:13 pm

TropikThunder wrote:
Tue Mar 03, 2020 8:42 pm
Does the bolded section mean you can't TLH a fund you have owned for less than 30 days? If I buy VTSAX on Feb 24th and sell it at a loss on Mar 3rd, then I have obviously bought a "substantially identical stock or securities" (truly identical in this case) "within 30 days before or after the sale". Isn't that why people advise turning off dividend reinvestment? If this is a problem, what about someone who, for example:
In a wash sale, the disallowed loss is added to the cost basis of replacement shares (so the loss is not gone, just deferred until the sale of the replacement shares). If you buy something and then sell it within 30 days, there are no replacement shares, so there can't be a wash sale.
.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by Nate79 » Tue Mar 03, 2020 9:37 pm

stan1 wrote:
Tue Mar 03, 2020 7:57 pm
There have been multiple S&P 500 index funds available to retail investors for more than 30 years. Vanguard Index 500 started in 1976 and Fidelity 500 started in 1988 to name two of the highest visibility retail S&P 500 funds.

How many years must we wait for the IRS to declare different S&P 500 index funds to be substantially identical? What if they never do? If IRS has had 30 plus years to do something about it and haven't done so I have to conclude they are OK with it, or it isn't worth their time.

I am quite comfortable tax loss harvesting between two funds/ETFs that use the same index. Where I draw the line is between share classes, because I can convert mutual fund share classes to ETF share classes as a non-taxable event. If new information emerges I will conform going forward but I don't see the point of wringing my hands the rest of my life over whether the IRS is going to disallow my wash sale.
It's amazing how people are so scared of the IRS wash sale boogeyman. I have no issues TLH two funds that track the same index and could care less about imaginary wash sales due to 401k.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by TropikThunder » Wed Mar 04, 2020 12:36 am

lgs88 wrote:
Tue Mar 03, 2020 8:49 pm
As I understand it, the prohibition is against selling a position with a loss and then buying a substantially identical position. I do not believe that it is prohibited to book a loss on a position held for less than 30 days, which is -- I believe -- what you're suggesting. The day traders would be in trouble!

What I could not do is the following:

Own $100,000 of VTSAX with a capital loss
Buy $100,000 of VTSAX
Sell the $100,000 of VTSAX with a capital loss
Book that loss for tax purposes

lgs88
ruud wrote:
Tue Mar 03, 2020 9:13 pm
In a wash sale, the disallowed loss is added to the cost basis of replacement shares (so the loss is not gone, just deferred until the sale of the replacement shares). If you buy something and then sell it within 30 days, there are no replacement shares, so there can't be a wash sale.
Whew! :P

I think I must have known this already, but got a little nervous when I saw the "30 days before or after" part. I bought some VTSAX a week ago and swapped it for VFIAX today and all of a sudden I was worried I couldn't claim the loss since it was new. But I didn't have any VTSAX in that account before, and as long as I don't buy any more in the next 30 days I'm good.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by mega317 » Wed Mar 04, 2020 9:35 am

samsoes wrote:
Tue Mar 03, 2020 8:19 am
Folks, keep in mind that the words substantially identical means identical in substance.

If they are not identical in substance (made of the identical -- exact same -- stuff), they are not substantially identical.

There are only two words. Doesn't leave much room for interpretation.

(Just my 2 cents.)
I disagree with this. The word substantial leaves all the room in the world for interpretation.

I actually think it's a terrible phrase. Identical is a binomial, when you modify it it is meaningless.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by mega317 » Wed Mar 04, 2020 9:42 am

If they wanted to, it would be very easy for them to clarify with words such as percentage, correlation, index. They have not done so.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by retiringwhen » Wed Mar 04, 2020 9:59 am

mega317 wrote:
Wed Mar 04, 2020 9:35 am
samsoes wrote:
Tue Mar 03, 2020 8:19 am
Folks, keep in mind that the words substantially identical means identical in substance.

If they are not identical in substance (made of the identical -- exact same -- stuff), they are not substantially identical.

There are only two words. Doesn't leave much room for interpretation.

(Just my 2 cents.)
I disagree with this. The word substantial leaves all the room in the world for interpretation.

I actually think it's a terrible phrase. Identical is a binomial, when you modify it it is meaningless.
Your post implies that you did not realize that IRS Publication 550 explicitly uses the words "substantially identical". samsoes is pointing out that the IRS has given guidance, the problem is the guidance is about as precise as the pronouncements of a Haruspex.

The reason I disagree with samsoes conjecture about the precision is that that IRS gives examples and guidance that open up the definition of substantial in ways that cannot be resolved by the text alone, especially in the case of ETFs since the language of the guidance is silent on the treatment of investment companies in general, including ETFs and Mutual funds.

Excerpted from above (and Pub 550)
https://www.irs.gov/publications/p550#en_US_2018_publink100010601 wrote:
Substantially identical. In determining whether stock or securities are substantially identical, you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation. However, they may be substantially identical in some cases. For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.
Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation. However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make these bonds or preferred stock and the common stock substantially identical. For example, preferred stock is substantially identical to the common stock if the preferred stock:

- Is convertible into common stock,
- Has the same voting rights as the common stock,
- Is subject to the same dividend restrictions,
- Trades at prices that do not vary significantly from the conversion ratio, and
- Is unrestricted as to convertibility.
With all that said, based simply upon the reading of the text here, I would have no concerns of the OPs original concern of selling an ETF and replacing it solely with one its constituent companies being interpreted as a wash sale since at a minimum. the price movements will surely be different, it has different voting rights, is not convertible (by mere individual investors and only in baskets of stocks, not just one) and has different dividend schedules and amounts/yields.

It has been discussed repeatedly that trading one stock for another of the same sector (e.g,. Electric Utilities) will not trigger a wash sale.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by rkhusky » Wed Mar 04, 2020 10:04 am

Nate79 wrote:
Tue Mar 03, 2020 9:37 pm
It's amazing how people are so scared of the IRS wash sale boogeyman. I have no issues TLH two funds that track the same index and could care less about imaginary wash sales due to 401k.
Some want to abide by the spirit of the wash sale rule, which is that the taxpayer should change his economic position in order to claim a loss on his taxes. Others want to push the envelope and take advantage of IRS ambiguity or inaction where ever they can.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by mega317 » Wed Mar 04, 2020 11:14 am

retiringwhen wrote:
Wed Mar 04, 2020 9:59 am
Your post implies that you did not realize that IRS Publication 550 explicitly uses the words "substantially identical".
I said nor implied nothing of the sort.
The reason I disagree with samsoes conjecture about the precision is that that IRS gives examples and guidance that open up the definition of substantial in ways that cannot be resolved by the text alone
We are saying the same thing.
https://www.bogleheads.org/forum/viewtopic.php?t=6212

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by retiringwhen » Wed Mar 04, 2020 11:15 am

mega317 wrote:
Wed Mar 04, 2020 11:14 am
retiringwhen wrote:
Wed Mar 04, 2020 9:59 am
Your post implies that you did not realize that IRS Publication 550 explicitly uses the words "substantially identical".
I said nor implied nothing of the sort.
The reason I disagree with samsoes conjecture about the precision is that that IRS gives examples and guidance that open up the definition of substantial in ways that cannot be resolved by the text alone
We are saying the same thing.
Sorry for the mis-reading, but I am glad we agree :beer

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by dachshunddad » Wed Mar 04, 2020 11:20 am

I talked to Fidelity recently and asked about the topic of wash sales. In the OP instance they wouldn't report a wash. Similarly, they wouldn't report a wash for different ETF total market funds. However, they do report a wash to the IRS if you say bought apple within the 30 day period.

For clarification: for those who hold a tight definition of wash sale (ie something you wouldn't be comfortable with but Fidelity didn't consider) would the concern be that you got audited and the IRS wanted to take issue and argue how close to identical they are? On the surface it would seem that if the brokerage doesn't consider it that would hold some weight?

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by mega317 » Wed Mar 04, 2020 11:35 am

dachshunddad wrote:
Wed Mar 04, 2020 11:20 am
However, they do report a wash to the IRS if you say bought apple within the 30 day period.
Within the 30 day period of selling what?
https://www.bogleheads.org/forum/viewtopic.php?t=6212

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by dachshunddad » Wed Mar 04, 2020 11:41 am

mega317 wrote:
Wed Mar 04, 2020 11:35 am
dachshunddad wrote:
Wed Mar 04, 2020 11:20 am
However, they do report a wash to the IRS if you say bought apple within the 30 day period.
Within the 30 day period of selling what?

Sorry for the confusion. If you sold apple for a loss and then bought the same day or within 30 days they would report that as a wash.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by samsoes » Wed Mar 04, 2020 1:50 pm

mega317 wrote:
Wed Mar 04, 2020 9:35 am
samsoes wrote:
Tue Mar 03, 2020 8:19 am
Folks, keep in mind that the words substantially identical means identical in substance.

If they are not identical in substance (made of the identical -- exact same -- stuff), they are not substantially identical.

There are only two words. Doesn't leave much room for interpretation.

(Just my 2 cents.)
I disagree with this. The word substantial leaves all the room in the world for interpretation.

I actually think it's a terrible phrase. Identical is a binomial, when you modify it it is meaningless.
No, not necessarily. Some things could be identical in appearance (apparently identical), but not identical in substance (substantially identical).

"Substantial" has as its root "substance." Substantially identical = identical in substance (made of the same stuff).
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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by rkhusky » Wed Mar 04, 2020 1:58 pm

dachshunddad wrote:
Wed Mar 04, 2020 11:20 am
I talked to Fidelity recently and asked about the topic of wash sales. In the OP instance they wouldn't report a wash. Similarly, they wouldn't report a wash for different ETF total market funds. However, they do report a wash to the IRS if you say bought apple within the 30 day period.

For clarification: for those who hold a tight definition of wash sale (ie something you wouldn't be comfortable with but Fidelity didn't consider) would the concern be that you got audited and the IRS wanted to take issue and argue how close to identical they are? On the surface it would seem that if the brokerage doesn't consider it that would hold some weight?
The next time you talk to Fidelity you might ask whether they would flag and/or report a wash sale if Apple was purchased in a customer's IRA account a day or two after selling for a loss in his taxable account.

Brokerages are required to report wash sales of an identical investment in the same account. They typically don't go beyond the requirement. For example, they generally won't flag a wash sale between different accounts of a customer, between a customer's account and his spouse's account, between accounts held at different brokerages, or between substantially identical investments that are not the exact same investment. It's up to the taxpayer to report many wash sale transactions.
Last edited by rkhusky on Wed Mar 04, 2020 2:42 pm, edited 1 time in total.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by retiringwhen » Wed Mar 04, 2020 2:02 pm

samsoes wrote:
Wed Mar 04, 2020 1:50 pm
"Substantial" has as its root "substance." Substantially identical = identical in substance (made of the same stuff).
Unfortunately, the IRS gave their own interpretation to the term Substantially identical and it is not based on Merriam-Webster or the Oxford English Dictionaries.

Even worse they essentially said, it depends, sigh.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by dachshunddad » Wed Mar 04, 2020 3:06 pm

rkhusky wrote:
Wed Mar 04, 2020 1:58 pm
dachshunddad wrote:
Wed Mar 04, 2020 11:20 am
I talked to Fidelity recently and asked about the topic of wash sales. In the OP instance they wouldn't report a wash. Similarly, they wouldn't report a wash for different ETF total market funds. However, they do report a wash to the IRS if you say bought apple within the 30 day period.

For clarification: for those who hold a tight definition of wash sale (ie something you wouldn't be comfortable with but Fidelity didn't consider) would the concern be that you got audited and the IRS wanted to take issue and argue how close to identical they are? On the surface it would seem that if the brokerage doesn't consider it that would hold some weight?
The next time you talk to Fidelity you might ask whether they would flag and/or report a wash sale if Apple was purchased in a customer's IRA account a day or two after selling for a loss in his taxable account.

Brokerages are required to report wash sales of an identical investment in the same account. They typically don't go beyond the requirement. For example, they generally won't flag a wash sale between different accounts of a customer, between a customer's account and his spouse's account, between accounts held at different brokerages, or between substantially identical investments that are not the exact same investment. It's up to the taxpayer to report many wash sale transactions.
Gotcha, that makes sense.

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Re: Would this be considered a wash sale? Selling an ETF for a loss and then buying one of the ETF's component stocks

Post by grog » Wed Mar 25, 2020 3:02 pm

AlohaJoe wrote:
Mon Mar 02, 2020 11:02 pm
MotoTrojan wrote:
Mon Mar 02, 2020 10:51 pm
I’ve seen a poster on here openly swap IVV for VOO, an S&P500 to S&P500. Too far for me but I’ve done VTI for ITOT.
Personally I think that even the (very common) Boglehead switch from the S&P 500 to Total Stock Market or from e.g. FTSE ex-US to S&P ex-US indices are breaking the rule. The rule is clearly intended to disallow "not taking risk". But the entire goal of a typical Boglehead tax loss harvest is to switch funds and "not take risk" by picking indexes that are virtually economically indistinguishable.

But I also don't think the IRS really cares or will ever investigate anyone about it. Even if you were audited, I doubt they'd mention it.
It feels kind of shady to me, too. When I first learned of the concept of "wash sale" my intuition was that if you sold a fund that held Microsoft, Apple, Exxon, etc. and then bought a fund that also held those same companies you'd be essentially creating numerous mini-wash sales. But the other way to look at it is to view each fund as an individual security and to ignore the underlying holdings. Since your tax basis is based on the fund and not the underlying holdings, there's some sense in likewise taking an aggregate approach with wash sales (and it certainly makes the record keeping simpler). I can see both perspectives, but the aggregate fund-level view seems a lot more practical. As far as "not taking risk," that just seems like a natural benefit of diversification. You have diversified away the idiosyncratic risk and are left mostly with market beta. If the IRS were to get stricter about all this I suspect we'd start to see funds designed to track market beta that could work around any set of rules. To prevent this, the IRS would need to come out with a new standard, something like "statistically similar exposure."

I work a little bit with the tax department at work and after a few interactions with them I quickly came to the conclusion that intuition and what makes sense are NOT good guides when it comes to taxes. It feels more like a game where the rules are negotiated as you go. From what I gather companies are fairly aggressive in interpreting the rules in whatever way is most favorable to them (although they try to avoid antagonizing the IRS unnecessarily). They think about how likely something would be to get challenged and whether it's worth reaching for. The don't seem to care much about the original intention of an IRS rule. If there's some situation the IRS failed to consider and a company sees an opportunity, they will usually jump on it.

One last point: I don't know how much the government loses on these capital loss write-offs during market crashes, but in terms of policy they might not mind such a tax deferral since they are usually concurrently pursuing stimulus measures. I mean, they are looking at a $2 trillion stimulus right now. Why be stingy about capital losses at the the same time?

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