VTSMX and Substantially Identical Funds

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Cognitive_Squeeze
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VTSMX and Substantially Identical Funds

Post by Cognitive_Squeeze » Tue Sep 29, 2015 4:15 pm

I'm still researching this topic. There is a lot of great information on this forum.

I'm considering realizing my loses on VTSMX.

VTSMX - Vanguard Total Stock Market Index Fund Investor Shares

Update: the statement above is incorrect

As I see it, one option will be to buy VTI - Vanguard Total Stock Market ETF after selling VTSMX. ( Update: this is wrong, read along)

However, I am concerned with a wash sale. Is VTSMX "substantially identical" to any of these ones?

VTINX - Target Retirement Income
VGHCX - Healthcare
VWELX - Vanguard Wellington Fund Investor Shares
SWPPX - Schwab S&P 500 Index Fund
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Re: VTSMX and Substantially Identical Funds

Post by alex_686 » Tue Sep 29, 2015 4:21 pm

Tico_75 wrote:As I see it, one option will be to buy VTI - Vanguard Total Stock Market ETF after selling VTSMX.
These are not just substantially similar - I think they are the same fund, just different share classes.

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Re: VTSMX and Substantially Identical Funds

Post by jebmke » Tue Sep 29, 2015 4:27 pm

You can replicate Total Stock Market with a mix of S&P 500 and Extended Market Index in a ratio of approximately 70/30.
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Re: VTSMX and Substantially Identical Funds

Post by retiredjg » Tue Sep 29, 2015 4:33 pm

I think almost everybody would say that purchasing VTI would be a wash - it is a different share class of the same fund.

I don't consider any of the others to be a problem. I doubt anyone would, but there might be someone who would avoid the 500 index.

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Re: VTSMX and Substantially Identical Funds

Post by Cognitive_Squeeze » Tue Sep 29, 2015 4:43 pm

Thanks for the feedback.

VTSMX MF -> VTI ETF = wash sale

Now, it seems there could be a debate regarding the S&P 500.

a- S&P 500 v. VTSMX MF= could generate a wash sale
b- VTSMX = S&P 500 + Extended Market Index @ 70/30.
c- Update per comment below:
VTSMX MF -> VTHR ETF (Russell 3000 index) = Not wash sale


It seems someone should create a wash sale app.
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Re: VTSMX and Substantially Identical Funds

Post by jebmke » Tue Sep 29, 2015 4:46 pm

Tico_75 wrote:It seems someone should create a wash sale app.
There is one. It is called a tax return. Problem is that you may not get an output for three years.
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Re: VTSMX and Substantially Identical Funds

Post by cookymonster » Tue Sep 29, 2015 5:10 pm

A common mistake many, including myself have made, is to buy an S&P 500 index while also contributing to a same or different one in their 401k. This creates a potential wash sale of its own when it's time to sell.

I rebalance VTI with VV in taxable.

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Re: VTSMX and Substantially Identical Funds

Post by nisiprius » Tue Sep 29, 2015 5:26 pm

I can't speak to what the IRS thinks. Casual Googling suggests that nobody really knows. I am not a lawyer. I am certainly not a tax lawyer. And I am certainly not the IRS.

In terms of what makes logical sense, swapping VTSMX for VTI would seem to be questionable because they are different share classes of the same fund, and I personally would consider them to be "substantially identical." They hold the same portfolio, exactly.

Since Total Stock is a portfolio of 3,809 stocks containing very close to 100% of the market cap of the U.S. market, while any S&P 500 fund is a portfolio of about (!) 500 stocks containing only about 80% of the market cap of the U.S. market, I don't see how anybody could consider them to be "identical." They are different, there are not only differences in the list of holdings but smallish differences in their total returns, growth charts, etc.

If you went the S&P 500 route I don't know any reason to choose Schwab instead of Vanguard, or any reason not to.

Vanguard Total Stock tracks the CRSP US Total Market Index. Other total stock market funds track different total market indexes. For example, Vanguard has a little-known ETF, VTHR, which tracks the Russell 3000 index. Are these substantially identical? Just speaking personally I think that their behavior is substantially identical, but legalistically I don't see how you could say the actual holdings are substantially identical, since one has 3,809 stocks and the other has 3,023 stocks.

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Re: VTSMX and Substantially Identical Funds

Post by lack_ey » Tue Sep 29, 2015 5:56 pm

Mike Piper had part of an article dedicated to what's "substantially identical" and his conclusion is also that there's no real official IRS clarification on the matter, and hunting people down over potential wash sales based on things that may or may not be kind of identical is not much of a priority for them.
http://www.obliviousinvestor.com/tax-loss-harvesting/

But his personal opinion is that two different total market funds based on different indices is too close for comfort. I've got to agree with him there. Then again, I have no idea whether or not the IRS sees it the same way, and that's what matters.

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Re: VTSMX and Substantially Identical Funds

Post by livesoft » Tue Sep 29, 2015 6:05 pm

nisiprius wrote:If you went the S&P 500 route I don't know any reason to choose Schwab instead of Vanguard, or any reason not to.
As mentioned in the Bogleheads wiki, one reason perhaps not to would be having that fund in one's (or a spouse's) IRA or even 401(k) where transactions might interfere and cause wash sales.
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Re: VTSMX and Substantially Identical Funds

Post by max12377 » Tue Sep 29, 2015 7:28 pm

jebmke wrote:You can replicate Total Stock Market with a mix of S&P 500 and Extended Market Index in a ratio of approximately 70/30.
I had thought the ratio was 80/20. Has this changed ? Just curious.

Tx

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Re: VTSMX and Substantially Identical Funds

Post by lack_ey » Tue Sep 29, 2015 7:42 pm

max12377 wrote:
jebmke wrote:You can replicate Total Stock Market with a mix of S&P 500 and Extended Market Index in a ratio of approximately 70/30.
I had thought the ratio was 80/20. Has this changed ? Just curious.

Tx
No, and last time I checked (months ago), IIRC it was even higher, like 81-82%.

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Re: VTSMX and Substantially Identical Funds

Post by rkhusky » Wed Sep 30, 2015 7:23 am

If one is concerned that an S&P 500 fund would cause a wash with VTSMX, then adding up to 30% Extended Market would be of even more concern (assuming the current ratio is 80/20). Personally, I don't think an S&P 500 fund would cause a wash with VTSMX, nor an 80/20 mix of S&P 500 and Extended Market (with 70/30 even less likely).

I think that replacing a Vanguard S&P 500 fund with a Schwab S&P 500 fund or vice versa would cause a wash sale (and therefore, if one causes a wash sale, the other would too).

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Re: VTSMX and Substantially Identical Funds

Post by Cognitive_Squeeze » Wed Sep 30, 2015 10:24 am

Per this discussion:

TLH for absolute dummies [Tax Loss Harvesting]

viewtopic.php?t=172568
Some good exchanges (including vice versa) for funds in Vanguard:

VTSAX, VTSMX --> VLCAX or VFIAX or VLACX (Note: Holding VSMAX and VLACX at 12%/88% ratio approximates Total Stock Market. Useful if you end up keeping the Alternate Fund for the long haul.)
VTIAX, VGTSX --> VFWAX
VGTSX (Total International Stock Index) --> VFWAX (FTSE All-World ex-US Index Fund)
VBTLX --> VBIIX
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Re: VTSMX and Substantially Identical Funds

Post by dbr » Wed Sep 30, 2015 11:11 am

A standard comment to add to this kind of discussion is that there is a standing Bogleheads reward for anyone who can provoke the IRS into calling a wash sale on any mutual fund transaction whatsoever, aside from absolutely identical. I bet nobody would even get them to find an exchange between share classes of the same fund to be a wash sale.

It might be interesting to see if Vanguard would report that exchange as a wash sale. Perhaps someone could call them and ask.

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Re: VTSMX and Substantially Identical Funds

Post by Cognitive_Squeeze » Wed Sep 30, 2015 12:08 pm

dbr wrote:Perhaps someone could call them and ask.
Please let me know what they say!

If I were the IRS, I would add some wording to define substantially identical as "closely correlated funds with more than 75% overlap."
Question:

What's closely correlated but not substantially identical to VGHCX - Healthcare?


Another good article,


https://www.kitces.com/blog/the-wash-sa ... and-etfs/
When it comes to mutual funds, though, the situation is murkier. Strictly speaking, the origin of the wash sale rules predates the first (open-ended) mutual fund, though with the passage of nearly 90 years since both have been in effect, there has still been remarkably little clarification on the issue. In former IRS Publication 564, the Service acknowledged that “ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund”, but without any clarification as to what circumstances two mutual funds could be substantially identical.
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Re: VTSMX and Substantially Identical Funds

Post by Phineas J. Whoopee » Wed Sep 30, 2015 1:12 pm

Tico_75 wrote:...
If I were the IRS, I would add some wording to define substantially identical as "closely correlated funds with more than 75% overlap."
...
The "substantially identical" wording comes from Congress, which empowered the IRS to write rules applying to specific situations.

There's logic and there's law, and sometimes the twain don't meet. How closely do funds have to be correlated to be "closely correlated," and is it based on total return or something else? What does "75% overlap" mean? Is it securities, or market caps, or markets, or proportions of specific securities within the fund? Should a cap-weighted S&P 500 fund be substantially identical to an even-weight S&P 500 one? They do in fact hold exactly the same securities (maybe except for operational cash reserves).

Is it reasonably likely one judge would reach the same conclusion as a different judge?

If the IRS intends to provide guidance on how specifically to apply the law, its guidance should adequately specific to accomplish its end.

And just how much potential tax revenue is lost, in practice, per year, based on the IRS or tax court not having ruled conclusively what substantially identical means with respect to mutual funds? I don't even know of any private letter ruling.

The IRS is operating well below the staffing level it says it needs to be efficient. One might agree or disagree with their request.

For other securities, I believe the practice of financial intermediaries is to report them as substantially identical if they have the same CUSIP number. My understanding might lack important details, so I invite additions or corrections.

PJW
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Re: VTSMX and Substantially Identical Funds

Post by FactualFran » Wed Sep 30, 2015 1:13 pm

It is better not to worry about whether the combination of 80% S&P 500 index fund and 20% completion index fund is substantially identical to a total market index fund whose index is 80% S&P 500 and 20% the completion index. A next step would be to worry about whether a $10,000 sale of a total stock market fund at a loss and a $10,000 purchase within 30 days of a fund of funds with 40% in the total market index fund is a wash sale for 40% of the loss.

I suspect that it is not a high priority with the IRS whether it is a wash sale when someone 1) sells shares of a mutual fund at a loss, 2) buys shares of other mutual fund(s) within 30 days of the sale, and 3) the sells and buys leave the person with the same investment exposure.

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Re: VTSMX and Substantially Identical Funds

Post by dbr » Wed Sep 30, 2015 1:39 pm

In general the idea is that people are not supposed to get a break on taxes while maintaining a more or less continuous unaltered position in the markets. It is obvious that it is child's play to harvest tax losses and cut one's taxes while hardly ruffling one's actual position in the market, when that position is defined as a diversified asset allocation realized by holding mutual funds.

The IRS apparently does not see enough revenue generation benefit relative to the effort to attack this problem through rule making, audit/enforcement, and litigation to pay any attention to it. Neither Congress nor the the President or Cabinet see an issue of sufficient concern to force action. The most recent example of the IRS doing anything about purchases and sales of securities that affects any of us has been the implementation of broker reporting of cost basis. I would imagine finagling the cost basis had been a much larger source of uncollected tax leakage than a little tax loss harvesting has ever been.

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Re: VTSMX and Substantially Identical Funds

Post by Cognitive_Squeeze » Wed Sep 30, 2015 2:28 pm

Phineas J. Whoopee wrote: And just how much potential tax revenue is lost, in practice, per year, based on the IRS or tax court not having ruled conclusively what substantially identical means with respect to mutual funds? I don't even know of any private letter ruling.
So far zero dollars and zero cents from me. I'm looking forward to changing that with this forum's help.
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Re: VTSMX and Substantially Identical Funds

Post by Blister » Wed Sep 30, 2015 3:05 pm

Has anyone on this forum ever been denied a tax loss based on a wash sale? If so what were the circumstances?
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Re: VTSMX and Substantially Identical Funds

Post by dbr » Wed Sep 30, 2015 7:03 pm

Blister wrote:Has anyone on this forum ever been denied a tax loss based on a wash sale? If so what were the circumstances?
If there is and it wasn't an actually identical sale, then we are still waiting to hear it. It doesn't hurt to canvass the neighborhood again. There is a standing reward.

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Re: VTSMX and Substantially Identical Funds

Post by LadyGeek » Wed Sep 30, 2015 8:37 pm

Tico_75 wrote:
Phineas J. Whoopee wrote: And just how much potential tax revenue is lost, in practice, per year, based on the IRS or tax court not having ruled conclusively what substantially identical means with respect to mutual funds? I don't even know of any private letter ruling.
So far zero dollars and zero cents from me. I'm looking forward to changing that with this forum's help.
As a reminder, suggestions of dishonest behavior or bypassing the law are totally unacceptable.

The OP wishes to understand the correct application of substantially identical to minimize income taxes paid.
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Re: VTSMX and Substantially Identical Funds

Post by LadyGeek » Wed Sep 30, 2015 8:39 pm

To interested in decomposing the Vanguard Total Stock Market Index fund, see: Approximating total stock market
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