Can I tax loss harvest with VTI if I hold VTSAX?

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dave.m
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Can I tax loss harvest with VTI if I hold VTSAX?

Post by dave.m »

Im trying to better understand the tax loss harvesting rules, specifically regarding a wash sale. My understanding is that 31 days prior or after cannot but the Identical fund, which is why most people don’t reinvest their dividends so they control the days this money gets reinvested.

I realize many here might sell VTI and buy ITOT as it’s similar but not identical, as a way to avoid a wash sale during a tax loss harvesting event.

I’m also understanding that IRA account funds are also a factor in this equation. So if I’m holding VTSAX in my IRA, does that meant I shouldn’t hold VTI in a taxable account, as it would never allow me to trigger a tax loss harvest? Or is the only issue the constant reinvestment of VTSAX dividends in the IRA? Could I avoid this issue if I manually reinvested dividends in both my IRA and taxable account monthly? Or am I missing a piece to this puzzle?
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by terran »

If we say that VTSAX and VTI are substantially identical, which I would, then buying either within 30 days before or after the sale of the other at a loss in a taxable account would create a wash sale. However, merely holding one or the other doesn't create a wash sale. So as long as you don't buy VTSAX in the IRA within the timeframe, from dividend reinvestment or otherwise, then you'll be fine.
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dave.m
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by dave.m »

terran wrote: Fri Jan 31, 2025 9:58 am If we say that VTSAX and VTI are substantially identical, which I would, then buying either within 30 days before or after the sale of the other at a loss in a taxable account would create a wash sale. However, merely holding one or the other doesn't create a wash sale. So as long as you don't buy VTSAX in the IRA within the timeframe, from dividend reinvestment or otherwise, then you'll be fine.
That’s helpful. Thank you.

So, if I owned VTI in a taxable account for 2 years and it kept increasing in value until last month when it dropped, I’d likely only be selling my last few shares of VTI as the ones from long ago likely would still not be available to sell at a loss. I trust this is common for people who have been doing this awhile.

In this case assume I sell the last 3 months of VTI for ITOT (and pretend I don’t have an IRA for simplicity), what happens next? Let’s say I invest once per month in taxable to both add new funds and reinvest dividends. So in this case I’ll have 21 transaction purchases for VTI (24 months of investing minus the last 3 I just sold) and 1 purchase for ITOT (totaling 3 months of value though). What do I do the next month, am I buying more ITOT or going back to VTI so long as 31 days passed?
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by nassau34 »

Tax loss harvesting only matters if you have a loss. Seems unlikely to be the case with VTI unless you want to micromanage lots, but if it were I would go with VOO for at least a month.
Last edited by nassau34 on Fri Jan 31, 2025 11:26 am, edited 1 time in total.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by tashnewbie »

dave.m wrote: Fri Jan 31, 2025 11:02 am
terran wrote: Fri Jan 31, 2025 9:58 am If we say that VTSAX and VTI are substantially identical, which I would, then buying either within 30 days before or after the sale of the other at a loss in a taxable account would create a wash sale. However, merely holding one or the other doesn't create a wash sale. So as long as you don't buy VTSAX in the IRA within the timeframe, from dividend reinvestment or otherwise, then you'll be fine.
That’s helpful. Thank you.

So, if I owned VTI in a taxable account for 2 years and it kept increasing in value until last month when it dropped, I’d likely only be selling my last few shares of VTI as the ones from long ago likely would still not be available to sell at a loss. I trust this is common for people who have been doing this awhile.

In this case assume I sell the last 3 months of VTI for ITOT (and pretend I don’t have an IRA for simplicity), what happens next? Let’s say I invest once per month in taxable to both add new funds and reinvest dividends. So in this case I’ll have 21 transaction purchases for VTI (24 months of investing minus the last 3 I just sold) and 1 purchase for ITOT (totaling 3 months of value though). What do I do the next month, am I buying more ITOT or going back to VTI so long as 31 days passed?
If you want to avoid wash sales, you'd have to wait 31 days from the date you sold VTI at a loss to re-purchase it in taxable or the IRA (in the form of VTSAX). So if you want to invest new money during that period, you'd have to use ITOT or another fund. This is why you have to be okay holding TLH pairs for the long term.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

A problem also arises if you have purchased shares of VTSAX in your IRA and then a few weeks later, there is a good TLH opportunity for VTI. Do you wait 2 weeks until the wash sale window has cleared, do you sell all your VTSAX in the IRA, or do you just accept the wash sale and permanent disallowal of the loss for the number of shares purchased in the IRA? If you held something different in taxable versus tax-advantaged, you wouldn’t need to worry about it.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by terran »

dave.m wrote: Fri Jan 31, 2025 11:02 am In this case assume I sell the last 3 months of VTI for ITOT (and pretend I don’t have an IRA for simplicity), what happens next? Let’s say I invest once per month in taxable to both add new funds and reinvest dividends. So in this case I’ll have 21 transaction purchases for VTI (24 months of investing minus the last 3 I just sold) and 1 purchase for ITOT (totaling 3 months of value though). What do I do the next month, am I buying more ITOT or going back to VTI so long as 31 days passed?
As long as you sell all lots of VTI purchased within the last 30 days and don't buy again for 30 days there won't be a wash sale. This applies to all accounts.
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dave.m
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by dave.m »

nassau34 wrote: Fri Jan 31, 2025 11:05 am Tax loss harvesting only matters if you have a loss. Seems unlikely to be the case with VTI unless you want to micromanage lots, but if it were I would go with VOO for at least a month.
Sorry I wasn’t clear but that was a hypothetical.
I was genuinely asking if people in that example above would sell VTI and buy ITOT monthly until a potential TLH, or, after buying ITOT for 31 days do people go back to buying more VTI?
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

dave.m wrote: Fri Jan 31, 2025 11:54 am
nassau34 wrote: Fri Jan 31, 2025 11:05 am Tax loss harvesting only matters if you have a loss. Seems unlikely to be the case with VTI unless you want to micromanage lots, but if it were I would go with VOO for at least a month.
Sorry I wasn’t clear but that was a hypothetical.
I was genuinely asking if people in that example above would sell VTI and buy ITOT monthly until a potential TLH, or, after buying ITOT for 31 days do people go back to buying more VTI?
You would keep both unless a TLH opportunity came up where you could sell one. I would buy more VTI, since presumably you would have much more of that with much older shares.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by livesoft »

I can tax-loss harvest VTI even if I have either VTI or VTSAX or both in Roths, in tax-deferred IRAs, and even if my spouse owns VTI in all her accounts. How is that possible you may ask? Well, it is possible when one understands how wash sales are created, so that one also knows how to avoid them if necessary.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by suemarkp »

I would go back to buying VTI after 31 days. If you're lucky, a drop will occur in the market again in a few months and you can sell the ITOT and swap it for VTI. Tax Loss Harvesting is one of the times you need to do market timing.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by White Coat Investor »

dave.m wrote: Fri Jan 31, 2025 9:53 am Im trying to better understand the tax loss harvesting rules, specifically regarding a wash sale. My understanding is that 31 days prior or after cannot but the Identical fund, which is why most people don’t reinvest their dividends so they control the days this money gets reinvested.

I realize many here might sell VTI and buy ITOT as it’s similar but not identical, as a way to avoid a wash sale during a tax loss harvesting event.

I’m also understanding that IRA account funds are also a factor in this equation. So if I’m holding VTSAX in my IRA, does that meant I shouldn’t hold VTI in a taxable account, as it would never allow me to trigger a tax loss harvest? Or is the only issue the constant reinvestment of VTSAX dividends in the IRA? Could I avoid this issue if I manually reinvested dividends in both my IRA and taxable account monthly? Or am I missing a piece to this puzzle?
There are few true rules, but even a proponent of a pretty lax attitude toward wash sales like me isn't going to okay this one. VTI and VTSAX are the exact same investment.

I use VTI/ITOT and don't happen to open either in any IRAs so that's pretty easy for me. Continual manual reinvestment of dividends doesn't fix the wash sale issue, but it does allow you to watch it much more carefully and hold off a bit by investing into a different asset class that month. But even if a tiny bit of your sale is washed due to a reinvested dividend that isn't the end of the world.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by lazynovice »

I keep SCHB in our IRAs and then switch between VTI and ITOT in taxable.

If the market is especially bouncy and I am tax loss harvesting a lot - 2023 for instance- I might end up in SCHB in taxable if I am out of options but I have also used SCHX, VOO or an IVV and IJR combination. As a result, our taxable accounts are currently holding VTI, ITOT, SCHB, SCHX, IVV, IJR in varying amounts.

I use large drops as a chance to clean it all up- our international holdings are down to just VEU and IDEV.

I had automatic dividend reinvestment turned off when I was still earning because I used dividends to rebalance. I have them turned off in retirement because they go to my checking account.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by VanGar+Goyle »

terran wrote: Fri Jan 31, 2025 9:58 am If we say that VTSAX and VTI are substantially identical, which I would, then buying either within 30 days before or after the sale of the other at a loss in a taxable account would create a wash sale. However, merely holding one or the other doesn't create a wash sale. So as long as you don't buy VTSAX in the IRA within the timeframe, from dividend reinvestment or otherwise, then you'll be fine.
The scope of tax loss harvesting is a little bigger, including spouse's accounts, including a spouse's IRA accounts, and any corporation you control.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by dbr »

We are still waiting for anyone to provoke from the IRS a disallowed tax loss due to wash sale of anything other than exactly identical assets. We are also still waiting for the IRS to say one way or an another what not exactly identical mutual funds and ETFs are substantially identical. A person who can provoke any of that by audit, in tax court, or just by being obnoxious to the agency will be a hero around here.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

VanGar+Goyle wrote: Mon Feb 03, 2025 7:41 am
terran wrote: Fri Jan 31, 2025 9:58 am If we say that VTSAX and VTI are substantially identical, which I would, then buying either within 30 days before or after the sale of the other at a loss in a taxable account would create a wash sale. However, merely holding one or the other doesn't create a wash sale. So as long as you don't buy VTSAX in the IRA within the timeframe, from dividend reinvestment or otherwise, then you'll be fine.
The scope of tax loss harvesting is a little bigger, including spouse's accounts, including a spouse's IRA accounts, and any corporation you control.
It’s even bigger than that. The wash sale law doesn’t specify any particular type of account and there’s never been an exemption for any type of account. Therefore it applies to all of your and your spouse’s accounts.

And if you try to evade the wash sale law using a relative’s account, there’s the related party transaction law to deal with those situations too.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by livesoft »

White Coat Investor wrote: Sat Feb 01, 2025 5:29 pmThere are few true rules, but even a proponent of a pretty lax attitude toward wash sales like me isn't going to okay this one. VTI and VTSAX are the exact same investment.
FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by lazynovice »

livesoft wrote: Mon Feb 03, 2025 9:06 am
White Coat Investor wrote: Sat Feb 01, 2025 5:29 pmThere are few true rules, but even a proponent of a pretty lax attitude toward wash sales like me isn't going to okay this one. VTI and VTSAX are the exact same investment.
FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
I am not bold enough to try it, but the expense ratios are different, the dividends pay out and are reinvested at different times and one trades all day while the other trades at market close. They are invested in the same things and managed by the same people but they are different to me- substantially enough that I prefer the ETF.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by White Coat Investor »

livesoft wrote: Mon Feb 03, 2025 9:06 am
White Coat Investor wrote: Sat Feb 01, 2025 5:29 pmThere are few true rules, but even a proponent of a pretty lax attitude toward wash sales like me isn't going to okay this one. VTI and VTSAX are the exact same investment.
FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
Interesting. Shows just how inadequate the system really is to enforce any sort of tax loss harvesting rule.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by dratkinson »

dave.m wrote: Fri Jan 31, 2025 9:53 am Im trying to better understand the tax loss harvesting rules, specifically regarding a wash sale. My understanding is that 31 days prior or after cannot but the Identical fund, which is why most people don’t reinvest their dividends so they control the days this money gets reinvested.

I realize many here might sell VTI and buy ITOT as it’s similar but not identical, as a way to avoid a wash sale during a tax loss harvesting event.

I’m also understanding that IRA account funds are also a factor in this equation. So if I’m holding VTSAX in my IRA, does that meant I shouldn’t hold VTI in a taxable account, as it would never allow me to trigger a tax loss harvest? Or is the only issue the constant reinvestment of VTSAX dividends in the IRA? Could I avoid this issue if I manually reinvested dividends in both my IRA and taxable account monthly? Or am I missing a piece to this puzzle?
Important concepts.


Replacement shares. Don't create replacement shares within ±30days of a TLH, to which a disallowed TLH/stepped up cost basis can attach.
No replacement shares exist = no wash sale can exist.

There are 3ways to avoid creating replacement shares.
--Redirect distributions. Redirect all distros to mmkt/bank, so you control when new shares are purchases, so avoid creating replacement shares.
--Sell replacement shares with TLH. If you reinvest distros (create replacement shares) and want to TLH, if you sell replacement shares with the TLH, then no shares remain (purchased within 30days) to which a stepped up cost basis can attach, so no wash sale can be created.
--Own unique funds. If you own only unique funds (the same all-in-one reinvested fund in TA accounts is easiest, discrete redirected funds in family taxable accounts) then you own no fund that is "substantially identical" so can't create replacement shares, so can't create a wash sale.


Substantially identical funds. Fund are NOT substantially identical if they: (1) track different indexes, or (2) are actively managed by different managers. Read prospectus.


Worse case. If you create a wash sale so have replacement shares/stepped up cost basis in taxable, it'll be easier to TLH again later. And since you'll have learned your lesson, you'll TLH correctly the second time.


Roth replacement shares. Don't create replacement shares in a Roth account as you can't use the stepped up cost basis on a sale.
Last edited by dratkinson on Tue Feb 04, 2025 8:59 pm, edited 1 time in total.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by Thesaints »

The letter of the law is "substantially identical securities". The adverb "substantially" leaves the door open to interpretation.

Case law is that partially identical securities do not qualify to create a wash sale. For instance, VTSAX has a portfolio which contains the same securities as VFINX at approximately the 80% level. Yet, it is safe to use the pair for loss harvesting.

The jury is out for funds tracking the same index issued by different companies, for example Vanguard's VFINX and Fidelity FXAIX. Their portfolios are virtually identical, yet there no news of enforcement in that sense. It could be simply because big investors are sophisticated enough not to try it and small investors fly under the IRS radar, but this is just speculation.

Definitely, the same security held in different brokerage accounts does qualify for wash sale, even if neither brokerage will report it as such for obvious reasons.
A previous poster wrote that an IRA account would not count. I would not agree: easy to imagine a case where all the gains go into the IRA account and all the losses in the taxable one.

IRS publications discuss more complicated cases, for instance involving options, but again, last time I checked there were "grey" scenarios.
My opinion is that if one gets audited and the amount is worth the IRS effort, they will try to extend the meaning of "substantially".
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by exodusing »

livesoft wrote: Mon Feb 03, 2025 9:06 am
White Coat Investor wrote: Sat Feb 01, 2025 5:29 pmThere are few true rules, but even a proponent of a pretty lax attitude toward wash sales like me isn't going to okay this one. VTI and VTSAX are the exact same investment.
FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
The rules refer to substantially identical, without precise guidance. The practice seems to be to compare CUSIPs. I don't believe there are any reports of people having wash sale issues when the securities in question have different CUSIPs, but that's hardly controlling should the IRS challenge the reporting.

EDIT: Apparently there are reports. See the following post.
Last edited by exodusing on Mon Feb 03, 2025 12:42 pm, edited 1 time in total.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

exodusing wrote: Mon Feb 03, 2025 12:33 pm
livesoft wrote: Mon Feb 03, 2025 9:06 am

FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
The rules refer to substantially identical, without precise guidance. The practice seems to be to compare CUSIPs. I don't believe there are any reports of people having wash sale issues when the securities in question have different CUSIPs, but that's hardly controlling should the IRS challenge the reporting.
There are plenty of court cases/IRS rulings where wash sales applied to different CUSIP’s. Some are listed in the wiki page on wash sales.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

White Coat Investor wrote: Mon Feb 03, 2025 10:17 am
livesoft wrote: Mon Feb 03, 2025 9:06 am

FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
Interesting. Shows just how inadequate the system really is to enforce any sort of tax loss harvesting rule.
The requirement for brokerages to report wash sales is fairly recent, yet the wash sale law has been around for a hundred years. And people throughout the years have been caught making a wash sale and not reporting it.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by grabiner »

livesoft wrote: Mon Feb 03, 2025 9:06 am
White Coat Investor wrote: Sat Feb 01, 2025 5:29 pmThere are few true rules, but even a proponent of a pretty lax attitude toward wash sales like me isn't going to okay this one. VTI and VTSAX are the exact same investment.
FWIW, since VTI and VTSAX have different CUSIP numbers Vanguard will not flag wash sales between them even if they are in the same taxable account.

Late in 2024 I created a wash sale in the same Vanguard taxable account between VLCAX and its cognate exchange-traded fund VV. The 1099-B I received from Vanguard has no hint a wash sale occurred.
The IRS only requires brokerages to report wash sales for identical securities in the same account, so that is all they do. Even in cases in which the law is clear (sell a stock and buy an option to purchase that stock, sell a stock in taxable and buy it in your IRA), brokerages will not report the wash. For this, and many other situations, it is your responsibility to report everything properly on your Form 8949 even if your broker got it wrong.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by TimRCM »

I personally wouldn’t risk it. There’s so many good total market or S&P choices anymore to tax loss harvest with, such as SCHB or ITOT.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by AnEngineer »

dratkinson wrote: Mon Feb 03, 2025 12:05 pm No replacement shares exist = no wash sale can exist.

There are 3ways to avoid creating replacement shares.
-...
--Sell replacement shares with TLH. If you reinvest distros (create replacement shares) and want to TLH, if you sell replacement shares with the TLH, then no shares remain (purchased within 30days) to which a stepped up cost basis can attach, so no wash sale can be created.
I think the concept if replacement shares, depending on what you mean, is dangerous because it's not what the law says. For example, the law contains no exception for having sold the shares purchased within the wash sale window before selling at a loss. If everything is in taxable the net result may* be as if there's no wash sale. The concept may align with how the IRS will enforce the law, but they are not constrained to do so.

*I would say 'is' instead of 'may be', but some people think you can't adjust the basis of shares that have already been sold, so the answer depends on what you think about that. I see no reason why you can't adjust the basis after a sale.
That your facts or argument are wrong does not necessarily mean I disagree with your conclusion
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by dratkinson »

AnEngineer wrote: Wed Feb 05, 2025 6:22 am
dratkinson wrote: Mon Feb 03, 2025 12:05 pm No replacement shares exist = no wash sale can exist.

There are 3ways to avoid creating replacement shares.
-...
--Sell replacement shares with TLH. If you reinvest distros (create replacement shares) and want to TLH, if you sell replacement shares with the TLH, then no shares remain (purchased within 30days) to which a stepped up cost basis can attach, so no wash sale can be created.
I think the concept if replacement shares, depending on what you mean, is dangerous because it's not what the law says. For example, the law contains no exception for having sold the shares purchased within the wash sale window before selling at a loss. If everything is in taxable the net result may* be as if there's no wash sale. The concept may align with how the IRS will enforce the law, but they are not constrained to do so.

*I would say 'is' instead of 'may be', but some people think you can't adjust the basis of shares that have already been sold, so the answer depends on what you think about that. I see no reason why you can't adjust the basis after a sale.

The short answer. I recall livesoft's simple explanation (paraphrased), "If no shares exist after a TLH to which a stepped-up cost basis can attach, then no wash sale can exist."

I hope I'm not misremembering the topics. I could be as I searched the next and could not find references to support my (faulty?) memory.



The long answer. I too would have been uncertain before following livesoft's TLH tutorial and linked references.
See: viewtopic.php?t=179414

I recalled a linked Fairmark article (page 2) explained that situation (sell replacement shares with TLH), but checked it and that link no longer works.


What to do? I asked MS Copilot.

My question: "Does a wash sale exist in this situation: bought no shares 30 days before 1 Jan, on 1 Jan bought shares, on 10 Jan sold shares to tax-loss harvest (the sale included the shares bought on 1 Jan which did not have a loss), no additional shares were purchased in the following 30 days."

Copilot's answer: "In this scenario, a wash sale would not occur. Here's why:

No shares bought before January 1: You didn't purchase any shares in the 30 days before January 1.

Purchase on January 1: You bought shares.

Sale on January 10: You sold shares to tax-loss harvest, including the shares bought on January 1 (which did not have a loss).
[Added by me: These would have been replacement shares if not sold, and stepped up cost basis would have attached to them.]

No additional shares purchased: You did not buy any substantially identical shares within the 30 days following the sale on January 10.

Since you did not purchase any shares 30 days before or after the sale, the wash sale rule would not be triggered. You can claim the loss from the sale on January 10 for tax purposes."
d.r.a., not dr.a. | I'm a novice investor; you are forewarned. | AA: 50/50; taxable: 3fund w/munis; Roth: recommended stock funds for expected higher growth.
AnEngineer
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by AnEngineer »

dratkinson wrote: Thu Feb 06, 2025 1:40 am The short answer. I recall livesoft's simple explanation (paraphrased), "If no shares exist after a TLH to which a stepped-up cost basis can attach, then no wash sale can exist."

I hope I'm not misremembering the topics. I could be as I searched the next and could not find references to support my (faulty?) memory.



The long answer. I too would have been uncertain before following livesoft's TLH tutorial and linked references.
See: viewtopic.php?t=179414

I recalled a linked Fairmark article (page 2) explained that situation (sell replacement shares with TLH), but checked it and that link no longer works.


What to do? I asked MS Copilot.

My question: "Does a wash sale exist in this situation: bought no shares 30 days before 1 Jan, on 1 Jan bought shares, on 10 Jan sold shares to tax-loss harvest (the sale included the shares bought on 1 Jan which did not have a loss), no additional shares were purchased in the following 30 days."

Copilot's answer: "In this scenario, a wash sale would not occur. Here's why:

No shares bought before January 1: You didn't purchase any shares in the 30 days before January 1.

Purchase on January 1: You bought shares.

Sale on January 10: You sold shares to tax-loss harvest, including the shares bought on January 1 (which did not have a loss).
[Added by me: These would have been replacement shares if not sold, and stepped up cost basis would have attached to them.]

No additional shares purchased: You did not buy any substantially identical shares within the 30 days following the sale on January 10.

Since you did not purchase any shares 30 days before or after the sale, the wash sale rule would not be triggered. You can claim the loss from the sale on January 10 for tax purposes."
The stated rationale does not explain why 26 US Code 1091 (a) should be ignored. It contains no requirement that you get an adjustment of the basis on the shares whose purchase triggers the wash sale rule.

The livesoft thread you link is about what brokerages document. There are wash sales we know they don't document (e.g. across accounts).

I don't consider Copilot an expert on tax matters, but your example does not seem to include shares other than those purchased in the stated window. The IRS is bound to not consider this as a wash sale from Revenue Ruling 56-602 which covers this scenario.
That your facts or argument are wrong does not necessarily mean I disagree with your conclusion
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grabiner
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by grabiner »

dratkinson wrote: Thu Feb 06, 2025 1:40 am
AnEngineer wrote: Wed Feb 05, 2025 6:22 am

I think the concept if replacement shares, depending on what you mean, is dangerous because it's not what the law says. For example, the law contains no exception for having sold the shares purchased within the wash sale window before selling at a loss. If everything is in taxable the net result may* be as if there's no wash sale. The concept may align with how the IRS will enforce the law, but they are not constrained to do so.

*I would say 'is' instead of 'may be', but some people think you can't adjust the basis of shares that have already been sold, so the answer depends on what you think about that. I see no reason why you can't adjust the basis after a sale.

The short answer. I recall livesoft's simple explanation (paraphrased), "If no shares exist after a TLH to which a stepped-up cost basis can attach, then no wash sale can exist."

I hope I'm not misremembering the topics. I could be as I searched the next and could not find references to support my (faulty?) memory.



The long answer. I too would have been uncertain before following livesoft's TLH tutorial and linked references.
See: viewtopic.php?t=179414

I recalled a linked Fairmark article (page 2) explained that situation (sell replacement shares with TLH), but checked it and that link no longer works.


What to do? I asked MS Copilot.

My question: "Does a wash sale exist in this situation: bought no shares 30 days before 1 Jan, on 1 Jan bought shares, on 10 Jan sold shares to tax-loss harvest (the sale included the shares bought on 1 Jan which did not have a loss), no additional shares were purchased in the following 30 days."

Copilot's answer: "In this scenario, a wash sale would not occur. Here's why:

No shares bought before January 1: You didn't purchase any shares in the 30 days before January 1.
Copilot got this wrong; the correct rule is whether you purchased any shares in the 30 days before January 10 (the date of the sale).

Also, your situation is not the one Fairmark considered. Many brokerages would report this as an irrelevant wash sale. In the view of the brokerage's computer, you sold the old shares at 10:00:00.000000 and the new shares at 10:00:00.000001. Thus, when you sold the old shares, you still had the new shares, creating a wash sale. One microsecond later, you sold the new shares, with their basis increased by the wash sale rule. The total loss is the same as without the wash sale rule, but it is all realized on the new shares.

Here is the article you are looking for: https://fairmark.com/investment-taxatio ... ent-stock/ In this situation, you buy shares on June 1 and June 10, and sell the June 10 shares on June 20. The old shares exist, but they should not be replacements.

It says that as a matter of logic, this should not be a wash sale; however, there is a court ruling which implies that they are.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by deltaneutral83 »

dbr wrote: Mon Feb 03, 2025 7:55 am We are still waiting for anyone to provoke from the IRS a disallowed tax loss due to wash sale of anything other than exactly identical assets. We are also still waiting for the IRS to say one way or an another what not exactly identical mutual funds and ETFs are substantially identical. A person who can provoke any of that by audit, in tax court, or just by being obnoxious to the agency will be a hero around here.
This is the info. Theory and practice are separate here. I have spoken with probably two dozen folks over the decades about TLH, and not a single person has reported an issue as long as the CUSIP is different, this is all the brokerages track. I certainly wouldn't use the mutual fund as a TLH partner to the exact same fund as an ETF though, even if they had different CUSIP. Possibly at some point in the future someone will get the dreaded snail mail (or their CPA will) that they've been flagged for a wash sale on different mutual funds that are similar. And then the mythical question for the ages to the IRS "What exactly constitutes substantially identical" can be asked.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

deltaneutral83 wrote: Thu Feb 06, 2025 9:06 am
dbr wrote: Mon Feb 03, 2025 7:55 am We are still waiting for anyone to provoke from the IRS a disallowed tax loss due to wash sale of anything other than exactly identical assets. We are also still waiting for the IRS to say one way or an another what not exactly identical mutual funds and ETFs are substantially identical. A person who can provoke any of that by audit, in tax court, or just by being obnoxious to the agency will be a hero around here.
This is the info. Theory and practice are separate here. I have spoken with probably two dozen folks over the decades about TLH, and not a single person has reported an issue as long as the CUSIP is different, this is all the brokerages track. I certainly wouldn't use the mutual fund as a TLH partner to the exact same fund as an ETF though, even if they had different CUSIP. Possibly at some point in the future someone will get the dreaded snail mail (or their CPA will) that they've been flagged for a wash sale on different mutual funds that are similar. And then the mythical question for the ages to the IRS "What exactly constitutes substantially identical" can be asked.
I also know a lot of people who get paid under the table and never get caught. Doesn’t make it right.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by deltaneutral83 »

rkhusky wrote: Thu Feb 06, 2025 9:49 am I also know a lot of people who get paid under the table and never get caught. Doesn’t make it right.
This is non sequitur. While it's quite obvious that the same single company that's sold at a loss and rebought within 30 days is obviously a wash sale (which every brokerage I've ever dealt with handles automatically), the same cannot be said for different mutual funds/ETF's. Many have scoured the tax code, asked their CPA, researched online, for hours on end, only to come up with "substantially identical" from the IRS which is 100% subjective. In fact, the term "substantially" really is oxymoronic to place in front of "Identical" as "Identical" means identical. It should really be "substantially similar."

There is nothing subjective about the IRS code for getting paid in cash for employment and not reporting it (which I assume is the inference from your post).
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

deltaneutral83 wrote: Thu Feb 06, 2025 1:09 pm
rkhusky wrote: Thu Feb 06, 2025 9:49 am I also know a lot of people who get paid under the table and never get caught. Doesn’t make it right.
This is non sequitur. While it's quite obvious that the same single company that's sold at a loss and rebought within 30 days is obviously a wash sale (which every brokerage I've ever dealt with handles automatically), the same cannot be said for different mutual funds/ETF's. Many have scoured the tax code, asked their CPA, researched online, for hours on end, only to come up with "substantially identical" from the IRS which is 100% subjective. In fact, the term "substantially" really is oxymoronic to place in front of "Identical" as "Identical" means identical. It should really be "substantially similar."

There is nothing subjective about the IRS code for getting paid in cash for employment and not reporting it (which I assume is the inference from your post).
Investments that can be converted from one to another without selling and incurring taxes are substantially identical even if they have different CUSIP's.
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by dave.m »

rkhusky wrote: Fri Jan 31, 2025 11:27 am A problem also arises if you have purchased shares of VTSAX in your IRA and then a few weeks later, there is a good TLH opportunity for VTI. Do you wait 2 weeks until the wash sale window has cleared, do you sell all your VTSAX in the IRA, or do you just accept the wash sale and permanent disallowal of the loss for the number of shares purchased in the IRA? If you held something different in taxable versus tax-advantaged, you wouldn’t need to worry about it.
Could this be avoided I sell VTSAX in my IRA?

Or maybe another example would be, if I owned VTI in both my Roth and mg taxable.
When a TLH scenario is available allowing me to sell the last three months of purchases. Could I first sell all my VTI in the IRA from the past three months and buy something like a VOO. And once that transaction is complete, then go to my taxable, and sell VTI and buy ITOT to capture the tax loss harvest?

Would that avoid any conflict or wash sale?
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by AnEngineer »

dave.m wrote: Thu Feb 06, 2025 5:58 pm Could this be avoided I sell VTSAX in my IRA?
As above, no (edit: because there's still a purchase within the 61-day period starting 30 days before the sale at a loss), but three months is too long of a period to worry about. Unless you mean preparing by using different funds in taxable and tax advantaged accounts.

Also, if it's all in a taxable and you sell everything, any wash sales are just a documentation issue. The basis adjustment means the final tax situation is the same as if there's no wash sale.
Last edited by AnEngineer on Thu Feb 06, 2025 7:19 pm, edited 1 time in total.
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rkhusky
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Re: Can I tax loss harvest with VTI if I hold VTSAX?

Post by rkhusky »

dave.m wrote: Thu Feb 06, 2025 5:58 pm
rkhusky wrote: Fri Jan 31, 2025 11:27 am A problem also arises if you have purchased shares of VTSAX in your IRA and then a few weeks later, there is a good TLH opportunity for VTI. Do you wait 2 weeks until the wash sale window has cleared, do you sell all your VTSAX in the IRA, or do you just accept the wash sale and permanent disallowal of the loss for the number of shares purchased in the IRA? If you held something different in taxable versus tax-advantaged, you wouldn’t need to worry about it.
Could this be avoided I sell VTSAX in my IRA?

Or maybe another example would be, if I owned VTI in both my Roth and mg taxable.
When a TLH scenario is available allowing me to sell the last three months of purchases. Could I first sell all my VTI in the IRA from the past three months and buy something like a VOO. And once that transaction is complete, then go to my taxable, and sell VTI and buy ITOT to capture the tax loss harvest?

Would that avoid any conflict or wash sale?
Most tax advantaged accounts don’t provide SpecID, they use FIFO. You would have to sell all your holding to get to the most current shares. So, selling all your VTI and buying VOO would work.
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