Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

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DrivingFun
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Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by DrivingFun » Fri Aug 10, 2018 1:01 pm

Hi all, I've done some research on this but I believe I have now more questions than before attempting to research this.

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:
  1. 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).
  2. 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.
  3. 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.
Maybe there are other options, looking forward to your feedback :sharebeer

livesoft
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by livesoft » Fri Aug 10, 2018 1:05 pm

4. Sell whatever and whenever you want and create a wash sale. It is not illegal to create a wash sale. A wash sale is not a problem.
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livesoft
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by livesoft » Fri Aug 10, 2018 1:08 pm

5. Sell ALL shares. Since all shares are sold, there will be no future dividend that will create a wash sale. Since all shares are sold, there are no replacement shares to create a wash sale. Thus, no wash sale.
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DrivingFun
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by DrivingFun » Fri Aug 10, 2018 1:19 pm

livesoft wrote:
Fri Aug 10, 2018 1:08 pm
5. Sell ALL shares. Since all shares are sold, there will be no future dividend that will create a wash sale. Since all shares are sold, there are no replacement shares to create a wash sale. Thus, no wash sale.
Understood, however that's not the point of the question I suppose. Lets say I need a portion of that bond holding for some life event.

livesoft
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by livesoft » Fri Aug 10, 2018 1:20 pm

DrivingFun wrote:
Fri Aug 10, 2018 1:19 pm
livesoft wrote:
Fri Aug 10, 2018 1:08 pm
5. Sell ALL shares. Since all shares are sold, there will be no future dividend that will create a wash sale. Since all shares are sold, there are no replacement shares to create a wash sale. Thus, no wash sale.
Understood, however that's not the point of the question I suppose. Lets say I need a portion of that bond holding for some life event.
C'mon. Sell all shares anyways. Buy another tax-exempt bond fund with the money that is not need for some life event.
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DrivingFun
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by DrivingFun » Fri Aug 10, 2018 1:23 pm

livesoft wrote:
Fri Aug 10, 2018 1:05 pm
4. Sell whatever and whenever you want and create a wash sale. It is not illegal to create a wash sale. A wash sale is not a problem.
This seems to be #2 really. But I would love to know what role Vanguard plays here if any. If Vanguard simply sends me (and the IRS) a statement of realized gain without consideration of the wash sale, then there is some burden here to carry for me. I must first reduce the claimed loss by the disallowed amount. Then since the disallowed amount is actually added to the cost of the new shares, if Vanguard doesn't track that, then I have to track that somewhere. Or I suppose say forget it and not care about the small disallowed amount.

livesoft
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by livesoft » Fri Aug 10, 2018 1:24 pm

Vanguard tells people when they have a wash sale and reports that to the IRS. At least for covered shares. You can see this in action by selling about $20 of your fund today.
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sixty40
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by sixty40 » Fri Aug 10, 2018 5:15 pm

I am assuming you want to keep the fund, sell some shares but not pay too much in taxes on the gains. You can choose lots instead of average cost, first sell the shares that have a loss, then if you want more money start selling the shares with the least amount of gain first.

If you are concerned of a wash sale, stop dividend reinvestment, then wait a month, and then do your selling. I have had wash sales, it is not a big deal, usually only a few dollars disallowed so not of any concern.

livesoft
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by livesoft » Fri Aug 10, 2018 5:16 pm

^The OP stated there are no gains even if they use Average Cost as the basis method, so no taxes.
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sixty40
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by sixty40 » Fri Aug 10, 2018 5:30 pm

livesoft wrote:
Fri Aug 10, 2018 5:16 pm
^The OP stated there are no gains even if they use Average Cost as the basis method, so no taxes.
I read it as there is a net $200 unrealized loss, but that can be, as an example, $1000 in losses and $800 in gains which nets $200 unrealized losses, so one can sell all the losses and you end up with a fund with $800 in unrealized gains.

DrivingFun
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by DrivingFun » Fri Aug 10, 2018 6:31 pm

sixty40 wrote:
Fri Aug 10, 2018 5:15 pm
I have had wash sales, it is not a big deal, usually only a few dollars disallowed so not of any concern.
I'm curious as to how this is handled by Vanguard. The year end realized gain/loss paperwork will reflect the disallowed amount right? So basically I don't need to do the math myself, I can just punch it into Turbo Tax. Also based on the Wiki the disallowed amount is not "lost", it's simply absorbed by the shares that caused the wash sale. I'm wondering if Vanguard actually does that. Again I'm not concerned as the value of the disallowed amount is obviously negligible (a few dollars perhaps). I'm just curious to what extent Vanguard handles the entire situation.

livesoft
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by livesoft » Fri Aug 10, 2018 6:53 pm

DrivingFun wrote:
Fri Aug 10, 2018 6:31 pm
'm curious as to how this is handled by Vanguard. The year end realized gain/loss paperwork will reflect the disallowed amount right?
There is an entire thread with screen captures of a Vanguard account, Vanguard tax statements, tax prep software, and IRS tax forms showing wash sales:
viewtopic.php?t=179414
That thread should satisfy your curiosity.
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aristotelian
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by aristotelian » Fri Aug 10, 2018 7:03 pm

I would either go with selling all shares, or switch to SpecID and make sure you sell the last dividend along with whatever shares are showing losses.

Either way, turn off dividend reinvestment and then buy another fund with similar risk exposure, perhaps short term tax exempt. You can then sell again after 31 days and repurchase the original fund.

sixty40
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Re: Tax-Exempt Bond Fund, Reinvested Dividends, Wash Sale

Post by sixty40 » Fri Aug 10, 2018 10:24 pm

DrivingFun wrote:
Fri Aug 10, 2018 6:31 pm
sixty40 wrote:
Fri Aug 10, 2018 5:15 pm
I have had wash sales, it is not a big deal, usually only a few dollars disallowed so not of any concern.
I'm curious as to how this is handled by Vanguard. The year end realized gain/loss paperwork will reflect the disallowed amount right? So basically I don't need to do the math myself, I can just punch it into Turbo Tax. Also based on the Wiki the disallowed amount is not "lost", it's simply absorbed by the shares that caused the wash sale. I'm wondering if Vanguard actually does that. Again I'm not concerned as the value of the disallowed amount is obviously negligible (a few dollars perhaps). I'm just curious to what extent Vanguard handles the entire situation.
Once you sell your shares, the next day or so, you will see the activity and the realized gains in one of the tabs, including any wash sales. On your tax return, the wash sale is not reported since VG already took that into account and have already made the adjustment. VG does it all, you really do not have to do any calculations. If you use turbotax, you can punch it in manually or you can just download it from the VG website thru turboxtax when you do your taxes, which is what I do. It is the same for Schwab and probably any other investment firm. I used to manually input it but it got too long and cumbersome, but I still have my spreadsheet to doublecheck the numbers, and I have not found any unreasonable difference so far.

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