Lets say I have a $50,000 holding (accumulated over the years) in Intermediate Tax-Exempt. The dividends are reinvested monthly. Currently the fund is set to average cost. I've never actually sold any shares, only added to them. Currently the fund has about $200 unrealized loss. If I were to sell a portion at average cost, there will be a realized loss. Then of course there was a dividend a few weeks earlier (and one that is coming a few weeks after), which would result in a wash sale, as far as I understand.
So here I am trying to understand what my options are.
If I sell lets say $10,000 at average cost, it'll produce about $40 worth of realized loss. What is the best way to handle such scenario. Here are some things that come to mind in no particular order:
- Convert from average cost to individual lots, that way you can sell only shares with gains. I'm assuming this isn't smart as you're paying taxes on the gain vs. harvesting losses (as small as they are).
- Sell at average cost, realize the $40 loss, then reduce that amount due to the two dividend (one before and one after). The amount which you reduced by should be added to the new shares so you can realize it later (as far as I understand). Does Vanguard somehow keep track of that or is that completely on you? I mean both in realizing that a wash sale occurred due to dividends, adjusting your realized gain number, then tracking the "tacked on" cost to the dividend shares. If Vanguard doesn't do this for you, it seems like a pain.
- Anticipate the need to sell well in advance, divert dividends to another fund. Make sure there hasn't been a purchase in 30 days then make the sale. After 30 days divert the reinvestment of dividends back into the fund. This seems to completely avoid the problem but requires a lot of lead time in knowing when you'll need the money exactly.