Another couple of TLH wash sale questions -- sorry!

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bertilak
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Another couple of TLH wash sale questions -- sorry!

Post by bertilak » Fri May 22, 2020 9:38 am

About that wash rule:
  1. If you recently (less than 30 days) had a reinvested dividend does the wash sale disallow TLH for ALL holdings of that asset or just for the amount of the reinvested dividend?
  2. If you sell ALL holdings in an asset does that negate any recent (less than 30 days) dividend reinvestments?
How do specific ID sales relate to those questions?
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livesoft
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Re: Another couple of TLH wash sale questions -- sorry!

Post by livesoft » Fri May 22, 2020 9:45 am

1. Neither. The disallowed loss is the on the same number of shares purchased. This is explicitly described in IRS Publication 550. And the shares with the disallowed loss are the first affected shares by purchase date. The disallowed loss gets applied to the shares that created the wash sale.

2. Yes and no. Your broker may report a wash sale, but so what since the temporarily disallowed loss will be used to adjust the cost basis of some shares that get sold thus realizing the loss.

As for Spec ID vs Average, the application is to the cost basis which is usually different for these two cost basis methods.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by deltaneutral83 » Fri May 22, 2020 9:58 am

So day 1, sell fund A into fund B. Day 25, Fund B goes Ex-D. Day 32 market is down further, sell Fund B and go back into Fund A. Result, Fund B's div is non qualified and the div amount is considered a wash sale and the amount is added to the cost basis back into Fund A?

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Re: Another couple of TLH wash sale questions -- sorry!

Post by bertilak » Fri May 22, 2020 10:37 am

livesoft wrote:
Fri May 22, 2020 9:45 am
1. Neither. The disallowed loss is the on the same number of shares purchased. This is explicitly described in IRS Publication 550. And the shares with the disallowed loss are the first affected shares by purchase date. The disallowed loss gets applied to the shares that created the wash sale.

2. Yes and no. Your broker may report a wash sale, but so what since the temporarily disallowed loss will be used to adjust the cost basis of some shares that get sold thus realizing the loss.

As for Spec ID vs Average, the application is to the cost basis which is usually different for these two cost basis methods.
Thanks livesoft. I think I understood most of that -- still cogitating on how the "temporarily disallowed loss" becomes a realized loss. Is this on the assumption that if there is a sale at some future date there will be a tax advantage because of an increased cost basis? Or does that tax advantage apply at the time of this transaction?

Does it all boil down to "Don't worry about reinvested dividends when doing TLH because the damage is limited to the number of shares reinvested?" Does this leave us pretty close to where we would be if we hadn't reinvested those dividends in the first place?

About spec ID. I wasn't thinking in terms of comparison to average cost but, when making the sale, leaving out the shares purchased with the recent dividend. Any comments on this?
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Re: Another couple of TLH wash sale questions -- sorry!

Post by livesoft » Fri May 22, 2020 10:49 am

I think you really really really need to create a wash sale to ease your mind and see what happens. So yes, leave out selling the shares purchased with a dividend at first, then sell them the next day. I think I could explain all this until I am blue in the face, but until you do it, you won't get it.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by iceport » Fri May 22, 2020 12:53 pm

bertilak wrote:
Fri May 22, 2020 9:38 am
  1. If you recently (less than 30 days) had a reinvested dividend does the wash sale disallow TLH for ALL holdings of that asset or just for the amount of the reinvested dividend?
A wash sale is created when you sell shares at a loss and purchase replacement shares — defined as substantially identical assets purchased within the 61-day wash sale period.

So, if you harvest a loss but keep holding replacement shares, a wash sale is created. The loss (in dollars) on the number of shares sold at a loss that were replaced by replacement shares is disallowed. Each share sold at a loss is matched with a replacement share until you run out of either shares sold at a loss or replacement shares. But the loss (in dollars) on each share sold at a loss is then added to the cost basis of the replacement shares, on a share by share basis. When those replacement shares are sold, the cost basis adjustment will effectively make the original loss then become allowed.

So there is such a thing as a partial wash sale, when the number of shares sold at a loss is greater than the number of replacement shares held. Only the loss on the number of shares sold at a loss that can be matched with replacement shares is disallowed.

bertilak wrote:
Fri May 22, 2020 9:38 am
2. If you sell ALL holdings in an asset does that negate any recent (less than 30 days) dividend reinvestments?
If you harvest a loss and sell any potential replacement shares either before you sell the losing shares, or in the same sell order, then there will be no replacement shares left, and thus no wash sale.

As you can see, you need to identify which specific shares are to be sold if you intend to sell potential replacement shares without selling the entire holding. You also need to identify which specific shares are to be sold if you have a mix of tax lots with gains and losses, but only want to sell lots with losses.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by IndexCore » Fri May 22, 2020 1:59 pm

Others covered the descriptions of wash sales, maybe I can provide an example.

You bought 1,000 shares of something for $10/share. You paid $10,000 so that's your cost ("cost basis").

The price drops to $9/share and you sell half. You paid $5,000 and sold for $4,500, and let's say it's a wash sale.
Where does the $500 loss go? Back into the remaining shares.

You have $4,500 cash (from the sale) and 500 shares remaining. Although you paid $5,000 for this half, you will see a "cost basis" of $5,500 for these shares. They act like you paid $11/share, not $10/share, because your loss got added back in.

If you sell the rest also at $9/share, you get the full taxable loss ($4,500 sold when your cost was $5,500)... of $1,000.
It's possible I made a mistake or two with numbers, but hopefully that example makes wash sales a bit more clear.

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Re: Another couple of TLH wash sale questions -- sorry!

Post by livesoft » Fri May 22, 2020 2:02 pm

IndexCore wrote:
Fri May 22, 2020 1:59 pm
Others covered the descriptions of wash sales, maybe I can provide an example.
Uh-oh, because that example is not quite right because if the original 1000 shares were all bought in the same transaction, it is different.
See https://fairmark.com/investment-taxatio ... ent-stock/ and Example 2.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by Vanguard Fan 1367 » Fri May 22, 2020 2:24 pm

livesoft wrote:
Fri May 22, 2020 10:49 am
I think you really really really need to create a wash sale to ease your mind and see what happens. So yes, leave out selling the shares purchased with a dividend at first, then sell them the next day. I think I could explain all this until I am blue in the face, but until you do it, you won't get it.
I did some fabulous things with Boglehead help with TLH in March. I did end up with a wash sale amounting to a fairly small percentage of the total harvested. You are right, I believe I learned how to TLH and my wash sale was pretty harmless.
Upton Sinclair: "It is difficult to get a man to understand something when his salary depends on his not understanding it."

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Re: Another couple of TLH wash sale questions -- sorry!

Post by IndexCore » Fri May 22, 2020 3:09 pm

livesoft wrote:
Fri May 22, 2020 2:02 pm
IndexCore wrote:
Fri May 22, 2020 1:59 pm
Others covered the descriptions of wash sales, maybe I can provide an example.
Uh-oh, because that example is not quite right because if the original 1000 shares were all bought in the same transaction, it is different.
See https://fairmark.com/investment-taxatio ... ent-stock/ and Example 2.
I think you're right, that I need a third transaction for "replacement shares", and that my statement of "let's say it's a wash sale" isn't enough to cover that situation. So...

OP buys 500 shares at $10/share, then sells when the stock falls to $9/share, for a $500 loss. So far, no problem.

OP decides they just didn't give the stock enough of a chance, and within 30 days, buys 500 shares for $9/share. Selling but then replacing the shares turns the sale into a wash sale.

Rather than lose the original $500 loss, it gets added to the cost of the newly bought replacement shares. Instead of costing 500 x $9/share = $4,500... the brokerage will make a wash sale adjustment, and the cost becomes $5,000 for 500 shares. It's as though the sale and replacement were a wash, didn't happen, and OP is back to 500 shares with a cost basis of $5,000.

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Re: Another couple of TLH wash sale questions -- sorry!

Post by bertilak » Fri May 22, 2020 3:39 pm

IndexCore wrote:
Fri May 22, 2020 3:09 pm
Rather than lose the original $500 loss, it gets added to the cost of the newly bought replacement shares. Instead of costing 500 x $9/share = $4,500... the brokerage will make a wash sale adjustment, and the cost becomes $5,000 for 500 shares. It's as though the sale and replacement were a wash, didn't happen, and OP is back to 500 shares with a cost basis of $5,000.
Please analyze this scenario...

Our subject has 100 shares of XYZ with a long-standing cost basis of $10 per share for a total cost basis of $1000.
  1. There is a dividend of $1 which is reinvested at $10 per share. Our subject now has 101 shares which he paid a total of $1010 for.
  2. Less than 30 days later the stock crashes to $8 per share.
  3. All 101 shares are now sold at $8 per share ($808) resulting in a loss of $1010-$808=$202. That $808 is immediately invested in a very similar ABC.
So, where does our subject stand? I think he has a $200 long-term loss and a $2 short-term loss. How much of that can be used to offset other gains and/or regular income?
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Re: Another couple of TLH wash sale questions -- sorry!

Post by livesoft » Fri May 22, 2020 3:53 pm

All the loss. There is no net wash sale here.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by bertilak » Fri May 22, 2020 3:56 pm

livesoft wrote:
Fri May 22, 2020 3:53 pm
All the loss. There is no net wash sale here.
Got it. Thanks.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by grabiner » Fri May 22, 2020 10:20 pm

deltaneutral83 wrote:
Fri May 22, 2020 9:58 am
So day 1, sell fund A into fund B. Day 25, Fund B goes Ex-D. Day 32 market is down further, sell Fund B and go back into Fund A. Result, Fund B's div is non qualified and the div amount is considered a wash sale and the amount is added to the cost basis back into Fund A?
The dividend only creates a wash sale if it is reinvested in Fund A (so that you bought Fund A 24 days after selling), or if it is reinvested in Fund B and not sold at the same time as the other Fund B shares (so that you bought Fund B 7 days before selling). If the dividend is taken in cash, invested in Fund C, or invested in Fund B and sold together with the rest of the Fund B shares, there is no wash.

The dividend does become non-qualified because of the 61-day rule; you must hold a share for 61 days for any dividend on that share to be qualified. To avoid this, you must wait until Day 62 to sell Fund B.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by IndexCore » Sun May 24, 2020 3:38 am

bertilak wrote:
Fri May 22, 2020 3:39 pm
... That $808 is immediately invested in a very similar ABC
Did you mean to use the IRS term "substantially identical"(*) here?

Try thinking of the two groups of shares in isolation:
You sold 100 shares at a loss, and before 30 days were up, you bought replacement shares of the same thing. You paid $1000 long ago, but can't claim the loss when you sell at $800. You also paid $800 for the same asset... so the IRS won't let you claim a loss now, but does pretend your new $800 purchase actually cost you $1000. If you wait 2 months and sell again, with no price change, for $800... you could claim a loss then ($800 sale - $1000 cost basis = -$200 taxable loss)

It may help to think in money terms, not shares. The IRS doesn't care that you had a dividend and used the money somehow. It just cares that you had $10 and bought something. When you sold, you didn't wait 30 days, and bought the same thing again. That means your loss didn't age long enough before it went back into the same asset. So the IRS takes the original $10 cost, and moves that to the second purchase. You paid $8 for new shares of something, but the IRS says your cost is $10.


(*) The IRS hasn't defined what "substantially identical" means, so you will get different answers for "very similar". It's better to use real examples, like VTSAX (Vanguard Total Stock Market) and VFIAX (Vanguard 500 Index). Since the S&P 500 excludes small cap stocks, it's not substantially identical. I would say iShares ITOT and Vanguard VTI are substantially identical since they track the same index.

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Re: Another couple of TLH wash sale questions -- sorry!

Post by bertilak » Sun May 24, 2020 5:39 am

IndexCore wrote:
Sun May 24, 2020 3:38 am
bertilak wrote:
Fri May 22, 2020 3:39 pm
... That $808 is immediately invested in a very similar ABC
Did you mean to use the IRS term "substantially identical"(*) here?
No. I was being careful NOT to use that terminology.
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Re: Another couple of TLH wash sale questions -- sorry!

Post by IndexCore » Mon May 25, 2020 1:10 am

bertilak wrote:
Sun May 24, 2020 5:39 am
IndexCore wrote:
Sun May 24, 2020 3:38 am
bertilak wrote:
Fri May 22, 2020 3:39 pm
... That $808 is immediately invested in a very similar ABC
Did you mean to use the IRS term "substantially identical"(*) here?
No. I was being careful NOT to use that terminology.
Couldn't you just say "two different assets"?
I'm not sure I follow why you called them "very similar" if that's not relevant to the wash sale.

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Re: Another couple of TLH wash sale questions -- sorry!

Post by IndexCore » Mon May 25, 2020 1:11 am

bertilak wrote:
Sun May 24, 2020 5:39 am
IndexCore wrote:
Sun May 24, 2020 3:38 am
bertilak wrote:
Fri May 22, 2020 3:39 pm
... That $808 is immediately invested in a very similar ABC
Did you mean to use the IRS term "substantially identical"(*) here?
No. I was being careful NOT to use that terminology.
For me, I wouldn't say "very similar" if I meant two different assets.

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