Another wash sale confusion question

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NvidiaGTX405
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Another wash sale confusion question

Post by NvidiaGTX405 » Mon Dec 02, 2019 10:35 am

For a wash sale to occur, a sell of a security at a loss 30 days before and 30 days after and repurchase of a substantially identical security? Does it include dividend reinvestment? How would I know what a 'substantially identical security' is? Does it mean, repurchasing the same mutal or index fund after the 30 day window? Is vbinx, vtsmx, and a VG target date retirement index fund substantially identical?

lakpr
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Re: Another wash sale confusion question

Post by lakpr » Mon Dec 02, 2019 10:52 am

Yes it does include dividend reinvestment. But having a dividend reinvestment, which is usually tiny, only invalidates THAT MUCH amount of loss, not the entire loss. So if a dividend reinvestment occurred on November 15th, for example, for $200; and today you sold it the security for a loss of $3000; then $2800 loss is still applicable ($3000 - $200).

IRS has never clearly defined what a "substantially identical security" is, but it's a given that buying the same mutual fund again will be viewed as such. There are debates whether selling a Fidelity 500 index fund (FXAIX) and buying a Vanguard 500 index fund (VFIAX) is "substantially identical", some say yes and others say no. The "yes" argument is based on both funds tracking the same index, and the "no" argument is based on the precise percentages of each individual stock within the fund.

But almost all agree that selling a 500 index fund but buying a Large Cap index fund is NOT "substantially identical" due to the different make up of the fund as well as the percentages of the individual stocks within the fund. Usually therefore, you should keep a list of "Tax Loss Harvesting Partners" ready.

VTSMX and VBINX are NOT substantially identical, the first one is the Total Stock Market index (all stocks), and the latter is Balanced Index fund (40% bonds)
Vanguard Target Retirement Index funds again are not identical to any of the above two, since the percentage of stocks and bonds differ in TRD funds.

student
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Re: Another wash sale confusion question

Post by student » Mon Dec 02, 2019 10:55 am

lakpr wrote:
Mon Dec 02, 2019 10:52 am
Yes it does include dividend reinvestment. But having a dividend reinvestment, which is usually tiny, only invalidates THAT MUCH amount of loss, not the entire loss. So if a dividend reinvestment occurred on November 15th, for example, for $200; and today you sold it the security for a loss of $3000; then $2800 loss is still applicable ($3000 - $200).

IRS has never clearly defined what a "substantially identical security" is, but it's a given that buying the same mutual fund again will be viewed as such. There are debates whether selling a Fidelity 500 index fund (FXAIX) and buying a Vanguard 500 index fund (VFIAX) is "substantially identical", some say yes and others say no. The "yes" argument is based on both funds tracking the same index, and the "no" argument is based on the precise percentages of each individual stock within the fund.

But almost all agree that selling a 500 index fund but buying a Large Cap index fund is NOT "substantially identical" due to the different make up of the fund as well as the percentages of the individual stocks within the fund. Usually therefore, you should keep a list of "Tax Loss Harvesting Partners" ready.

VTSMX and VBINX are NOT substantially identical, the first one is the Total Stock Market index (all stocks), and the latter is Balanced Index fund (40% bonds)
Vanguard Target Retirement Index funds again are not identical to any of the above two, since the percentage of stocks and bonds differ in TRD funds.
Agree with everything lakpr said.

livesoft
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Re: Another wash sale confusion question

Post by livesoft » Mon Dec 02, 2019 10:58 am

Wash sales are not illegal.

Selling the exact same shares that were purchased in the previous 30 days at a loss is not a wash sale. One has to have purchased other shares that one still keeps in their possession for that sale-at-a-loss to be a wash sale. But even so, the loss is only temporarily disallowed since the disallowed loss is added to the basis of those other shares.

Too much text is devoted to avoiding wash sales and not enough text to how easy wash sales are treated after they have happened. To use a trite term: It's a gamechanger once one knows that wash sales are kinda cool.
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Topic Author
NvidiaGTX405
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Re: Another wash sale confusion question

Post by NvidiaGTX405 » Mon Dec 02, 2019 11:15 am

Since those 3 funds are not identical, a wash sale would not be possible then? That includes selling funds of vtsmx or vbinx and buying shares of a target retire date fund? Yes I know target retirement funds are suppose to be located inside a Roth IRA.

lakpr
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Re: Another wash sale confusion question

Post by lakpr » Mon Dec 02, 2019 11:21 am

NvidiaGTX405 wrote:
Mon Dec 02, 2019 11:15 am
Since those 3 funds are not identical, a wash sale would not be possible then? That includes selling funds of vtsmx or vbinx and buying shares of a target retire date fund? Yes I know target retirement funds are suppose to be located inside a Roth IRA.
Correct, but a bigger question is -- which of these funds sported losses this year? All are in the black??

livesoft
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Re: Another wash sale confusion question

Post by livesoft » Mon Dec 02, 2019 11:25 am

lakpr wrote:
Mon Dec 02, 2019 10:52 am
Yes it does include dividend reinvestment. But having a dividend reinvestment, which is usually tiny, only invalidates THAT MUCH amount of loss, not the entire loss. So if a dividend reinvestment occurred on November 15th, for example, for $200; and today you sold it the security for a loss of $3000; then $2800 loss is still applicable ($3000 - $200).
Just a nitpick ...

If dividend reinvestment occurred for $200, then the disallowed loss would be very unlikely to be $200 since it would depend on the number of shares bought with the dividend money and not on the dollar amount bought. Example: $3,000 loss on 100 shares (or $30 loss per share) and the $200 bought 2.191 shares at $91.28 each. The disallowed loss of $30 per share would be added to the $91.28 cost basis of those 2.191 shares, so it would look like you paid $200 + $30*2.191 for those shares or $265.73 for those shares making their basis $121.28 per share. The disallowed loss is $30 * 2.191 or just $65.73. Your brokerage should make the wash sale adjustment of the cost basis automatically for you.
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lakpr
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Re: Another wash sale confusion question

Post by lakpr » Mon Dec 02, 2019 11:29 am

livesoft wrote:
Mon Dec 02, 2019 11:25 am
lakpr wrote:
Mon Dec 02, 2019 10:52 am
Yes it does include dividend reinvestment. But having a dividend reinvestment, which is usually tiny, only invalidates THAT MUCH amount of loss, not the entire loss. So if a dividend reinvestment occurred on November 15th, for example, for $200; and today you sold it the security for a loss of $3000; then $2800 loss is still applicable ($3000 - $200).
Just a nitpick ...

If dividend reinvestment occurred for $200, then the disallowed loss would be very unlikely to be $200 since it would depend on the number of shares bought with the dividend money and not on the dollar amount bought. Example: $3,000 loss on 100 shares (or $30 loss per share) and the $200 bought 2.191 shares at $91.28 each. The disallowed loss of $30 per share would be added to the $91.28 cost basis of those 2.191 shares, so it would look like you paid $200 + $30*2.191 for those shares or $265.73 for those shares making their basis $121.28 per share. The disallowed loss is $30 * 2.191 or just $65.73. Your brokerage should make the wash sale adjustment of the cost basis automatically for you.
Thanks for correcting me!

livesoft
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Joined: Thu Mar 01, 2007 8:00 pm

Re: Another wash sale confusion question

Post by livesoft » Mon Dec 02, 2019 11:34 am

One more thing, in essence all the hullabaloo about turning off dividend reinvestment to avoid wash sales in a taxable account is just doing a disservice to folks who read bogleheads.org. The chances of a wash sale from a dividend reinvestment creating any hassles are very very very small. And small hassles that make one think are good for one's brain and well-being anyways.

But something to watch out for are the interaction of dividend reinvestment or other purchases in an IRA for the same or substantially identical investment.
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