Wash Sale Rules in Tax Advantaged Accounts

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jwills
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Wash Sale Rules in Tax Advantaged Accounts

Post by jwills »

Am I correct that wash sale rules do not need to be taken into consideration if all sales and purchases are within Tax Advantaged accounts?

Specifically, I have a bond fund (VBTLX) in my Roth IRA. (When we started our retirement savings, the Roths were the only accounts we had, so the bonds had to go somewhere…) But now that we have 401ks, I would rather hold all the bonds there, and get them out of the Roth. I have not sold them in Roth, because my weekly 401k contribution buys VBTLX and I was worried about the wash sale. But I think I am coming to understand that this is not something that really needs to be worried about if you are not actually selling at a loss with the intend to TLH? So I guess my questions are:

1. Am I fine to sell VBTLX in my Roth IRA, even if I am buying VBTLX weekly in my 401k?
2. Does one need to concern themselves with the wash sale rules in ANY account (including taxable) if one is not Tax Loss Harvesting?

As much as I read up on this I am not satisfied that I have it right, particularly for my specific instance of everything inside tax advantaged space.

Thank you
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David Jay
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by David Jay »

Wash sale rules only apply when you wish to deduct (on your tax return) a loss that occurs in a taxable account.

1. If there is no sale in a taxable account there is no wash sale.

2. If you do not claim the loss on your taxes, then a wash sale, if it occurs, has no impact.
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cchrissyy
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by cchrissyy »

Right, there is nothing wrong with causing a wash sale except the fact that when you have one, you can't deduct the loss until later.

since the whole concept of deducting a loss is irrelevant to retirement accounts, there is no need for you to think about wash sales as you make transactions in those accounts.
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iceport
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by iceport »

jwills wrote: Tue Oct 12, 2021 1:36 pm Am I correct that wash sale rules do not need to be taken into consideration if all sales and purchases are within Tax Advantaged accounts?
Yes.
jwills wrote: Tue Oct 12, 2021 1:36 pm 2. Does one need to concern themselves with the wash sale rules in ANY account (including taxable) if one is not Tax Loss Harvesting?
Well, yes. It's not necessary to intend to TLH, or to intend to create a wash sale, in order to create a wash sale. Often, wash sales are created completely by accident.

But when they are created, they must be dealt with. All that really means is that the taxable transactions involved have to be reported correctly on your tax return, and losses associated with wash sales will be disallowed. In other words, you'll need to concern yourself with wash sales well enough to report any created wash sale accurately, whether or not it was your intention to create one.

David Jay wrote: Tue Oct 12, 2021 1:40 pm 2. If you do not claim the loss on your taxes, then a wash sale, if it occurs, has no impact.
How does that work, in practice, not claiming a loss?

If the sale of a taxable asset results in a wash sale, and if the transaction is accurately reported, a wash sale will be identified and some or all of the loss will be — temporarily, at least — disallowed. So the means by which one does not claim a loss on a wash sale is by identifying it as such and handling the wash sale accounting properly, right?
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retiredjg
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by retiredjg »

jwills wrote: Tue Oct 12, 2021 1:36 pm Am I correct that wash sale rules do not need to be taken into consideration if all sales and purchases are within Tax Advantaged accounts?
Yes. A wash sale requires a sale at a loss in a taxable account. If you do not sell in taxable, there can be no wash sale.

1. Am I fine to sell VBTLX in my Roth IRA, even if I am buying VBTLX weekly in my 401k?
Yes.

2. Does one need to concern themselves with the wash sale rules in ANY account (including taxable) if one is not Tax Loss Harvesting?
If you sell something in a taxable account at a loss, you should consider wash sales. It does not matter if you intend to tax loss harvest or not.

If you do not sell something in taxable at a loss, there is no wash sale no matter what you are trying to accomplish.
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David Jay
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by David Jay »

iceport wrote: Tue Oct 12, 2021 3:01 pm
David Jay wrote: Tue Oct 12, 2021 1:40 pm2. If you do not claim the loss on your taxes, then a wash sale, if it occurs, has no impact.
How does that work, in practice, not claiming a loss?

If the sale of a taxable asset results in a wash sale, and if the transaction is accurately reported, a wash sale will be identified and some or all of the loss will be — temporarily, at least — disallowed. So the means by which one does not claim a loss on a wash sale is by identifying it as such and handling the wash sale accounting properly, right?
From the Wiki:

If you have a wash sale, you do not deduct the loss immediately, but you add the loss to your basis in the new shares, so that you can deduct the loss when you sell those shares. It is still better to take the loss earlier, as it produces an immediate benefit; in addition, a wash sale negates the value of tax loss harvesting.

For example, you bought 100 shares of a mutual fund at $40. On March 1, you sold 100 shares at $30. On March 10, you bought 100 shares at $35. Your sale on March 1 was a wash sale, so you could not deduct the $1,000 loss at the time, but your basis in the March 10 shares is $4,500, not $3,500, so you will reduce your capital gains or increase your losses when you sell those shares.
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iceport
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by iceport »

David Jay wrote: Tue Oct 12, 2021 3:21 pm
iceport wrote: Tue Oct 12, 2021 3:01 pm
David Jay wrote: Tue Oct 12, 2021 1:40 pm2. If you do not claim the loss on your taxes, then a wash sale, if it occurs, has no impact.
How does that work, in practice, not claiming a loss?

If the sale of a taxable asset results in a wash sale, and if the transaction is accurately reported, a wash sale will be identified and some or all of the loss will be — temporarily, at least — disallowed. So the means by which one does not claim a loss on a wash sale is by identifying it as such and handling the wash sale accounting properly, right?
From the Wiki:

If you have a wash sale, you do not deduct the loss immediately, but you add the loss to your basis in the new shares, so that you can deduct the loss when you sell those shares. It is still better to take the loss earlier, as it produces an immediate benefit; in addition, a wash sale negates the value of tax loss harvesting.

For example, you bought 100 shares of a mutual fund at $40. On March 1, you sold 100 shares at $30. On March 10, you bought 100 shares at $35. Your sale on March 1 was a wash sale, so you could not deduct the $1,000 loss at the time, but your basis in the March 10 shares is $4,500, not $3,500, so you will reduce your capital gains or increase your losses when you sell those shares.
Yes, exactly!

And that wash sale accounting is reflected on the tax return(s).

It's not like you just get to ignore the sale and not report the sale at all. And if the sale is reported, any wash sale must be reported.

Thus, some "concern" is warranted.
"Discipline matters more than allocation.” ─William Bernstein
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goingup
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by goingup »

jwills wrote: Tue Oct 12, 2021 1:36 pm Am I correct that wash sale rules do not need to be taken into consideration if all sales and purchases are within Tax Advantaged accounts?
Yes.
Topic Author
jwills
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by jwills »

Thank you for the thorough responses. I'll be glad to have them out of the Roth.
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bertilak
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Re: Wash Sale Rules in Tax Advantaged Accounts

Post by bertilak »

jwills wrote: Tue Oct 12, 2021 1:36 pm Am I correct that wash sale rules do not need to be taken into consideration if all sales and purchases are within Tax Advantaged accounts?
Yes but ...

A purchase in an IRA can trigger the wash sale rule for a sale in a taxable account. So what you say is true IF there is no loss in a taxable account. That does not mean you can ignore the wash sale rule in an IRA completely at all times and in all situations.

The situation to be avoided is
  1. Selling at a loss in a taxable account, potentially being able to use that loss to offset a gain or to offset regular income (at up to $3000 per year), and ...
  2. Negating the tax savings of A by re-purchasing (essentially) the same asset within 30 days. That purchase can be either before or after the sale AND (the point I am trying to emphasize) even if that purchase is in a tax-advantaged account (e.g. IRA).
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