Substantially identical?

[Doc]

We often get into discussions of what "substantially identical" means in practice.

I use 1-3 Treasury ETF's in taxable accounts as "cash" accumulators (SCHO and VGSH). For purposed of wash sales are these substantially identical?

Both use the Bloomberg (Barclay's?) US Treasury 1-3 Index. (Morningstar omits the Barclay's from their writeup for the Schwab ETF.)

The ten year total return for the two are 10475.53 an 10478.71. I consider that to be substantially identical.

I would like to here other's thoughts before I add my 11.8 cents per year on $10k.

Please add other pairs as you think would be illuminating

Thanks.

[arcticpineapplecorp.]

if they both track the same benchmark, i'd say yes. when i compare funds for replacement, I make sure they're not tracking the same benchmarks.

[happysteward]

if they both track the same benchmark, i'd say yes. when i compare funds for replacement, I make sure they're not tracking the same benchmarks.

+1

[barnaclebob]

I don't believe that pair would be considered substantially identical.

[arcticpineapplecorp.]

I don't believe that pair would be considered substantially identical.

why?

[arcticpineapplecorp.]

Both use the Bloomberg (Barclay's?) US Treasury 1-3 Index. (Morningstar omits the Barclay's from their writeup for the Schwab ETF.)

i would use the sites themselves, not a third party like morningstar.

both vanguard's and schwab's sites show this as the benchmark:

Bloomberg US 1-3 Year Treasury Idx (Benchmark)

source: https://investor.vanguard.com/etf/profi ... folio/vgsh
source: https://www.schwabassetmanagement.com/r ... fact-sheet

[retiringwhen]

I don't believe that pair would be considered substantially identical.

why?

I agree with barnaclebob as they are different fund companies.

BTW, do you two have a mutual friend in SpongeBob?

[H-Town]

They are more likely than not to be considered substantially identical. But it should not matter in practice. You likely won't get a loss when you sell. Even if you get a loss, your intention would not be harvesting loss with those treasury funds.

[Doc]

i would use the sites themselves, not a third party like morningstar.

both vanguard's and schwab's sites show this as the benchmark:

Bloomberg US 1-3 Year Treasury Idx (Benchmark)

Thanks. I assumed that to be the case and that Quicken just had "old" wording in one of the two. I was just to lazy to look at the individual sites.

[White Coat Investor]

We often get into discussions of what "substantially identical" means in practice.

I use 1-3 Treasury ETF's in taxable accounts as "cash" accumulators (SCHO and VGSH). For purposed of wash sales are these substantially identical?

Both use the Bloomberg (Barclay's?) US Treasury 1-3 Index. (Morningstar omits the Barclay's from their writeup for the Schwab ETF.)

The ten year total return for the two are 10475.53 an 10478.71. I consider that to be substantially identical.


Thanks.

Doesn't matter what you think. What matters is what the IRS thinks.

'I've been looking for years for someone that got audited on their tax loss harvesting. Haven't found anyone yet. So as near as I can tell, the IRS doesn't really care. As long as you're exchanging one fund for another (and not one fund for a different share class of the same fund) the brokerages that report wash sales to the IRS don't care.

So my advice is quit worrying about this. Pick two funds that follow different indexes but have a correlation of 0.99 and that you would be happy to hold either for the long term and use those as your tax loss harvesting partners.

If for some bizarre reason I used your two proposed funds that you think are substantially identical as tax loss harvesting partners and the IRS came after me for it, here would be my argument:

1) They're offered by different companies
2) One has a bond in it that is not in the other fund.
3) One has 66% turnover and the other has 73% turnover.
4) One has 17% in its top 10 holdings and the other has 23% in its top 10 holdings

If for some reason the auditor disagreed, I'd just use all my other tax losses instead of that particular one. Probably wouldn't change my tax bill one bit.

[Doc]

'I've been looking for years for someone that got audited on their tax loss harvesting. Haven't found anyone yet. So as near as I can tell, the IRS doesn't really care. As long as you're exchanging one fund for another (and not one fund for a different share class of the same fund) the brokerages that report wash sales to the IRS don't care.

As a side point. I made a number of trades at Schwab in December last year without worrying about wash sales. My 1099 reported the wash sales. Two or three trades with a wash sale of $0.01 each.

[Doc]

'I've been looking for years for someone that got audited on their tax loss harvesting. Haven't found anyone yet. So as near as I can tell, the IRS doesn't really care. As long as you're exchanging one fund for another (and not one fund for a different share class of the same fund) the brokerages that report wash sales to the IRS don't care.

As a side point. I made a number of trades at Schwab in December last year without worrying about wash sales. My 1099 reported the wash sales. Two or three trades with a wash sale of $0.01 each.

(They were all the same ETF.)

[LadyGeek]

This thread is now in the Personal Finance (Not Investing) forum (Wash sale).

[mega317]

What are the underlying holdings?

[mega317]

Schwab's website is a little cumbersome but...
The top 2 CUSIPs of SCHO are not in the top 30 of VGSH. That's a good sign to me that they may not be not substantially identical.
I think the posters here who know the case law have written that the overlap of underlying holdings is the relevant metric (not performance, for example).

[mega317]

Please add other pairs as you think would be illuminating

SPTS looks quite a bit different as well.
Would love alex_686 to hop in with their knowledge of prior cases involving bonds. I will venture a guess there are no short term treasury mutual fund cases but maybe something else relevant.

[arcticpineapplecorp.]

I don't believe that pair would be considered substantially identical.

why?

I agree with barnaclebob as they are different fund companies.

BTW, do you two have a mutual friend in SpongeBob?

1. it doesn't matter if they're different fund companies. Buying an S&P500 index fund from Vanguard and selling it for a loss and buying an S&P500 index fund from Schwab or Fidelity (within 30 days before or after) creates a wash sale because they're identical funds, regardless of the fund families. If it were that easy, there wouldn't be the amount of posts each day on bogleheads asking "Did I just mess up my TLH?"

2. I do enjoy me some spongebob, but that's not where the name comes from:

viewtopic.php?p=3231499#p3231499

[H-Town]

I would say $0.01 wash sale is more amusing than anything. Doesn't matter you lean one way or the other. It's $0.01 and will be rounded down to zero on a tax return.

[rob]

I now refuse to add restrictions to myself where the IRS could be bothered defining rules.... So I take "Substantially Identical" to be EXACTLY equal to "Identical" sans rules from the IRS that define the edge conditions around where it's not identical.

Would I lose in an audit... probably.... Would I still believe that I'm right when there are NO RULES... Yes!

[JackoC]

I don't believe that pair would be considered substantially identical.

why?

I agree with barnaclebob as they are different fund companies.

it doesn't matter if they're different fund companies. Buying an S&P500 index fund from Vanguard and selling it for a loss and buying an S&P500 index fund from Schwab or Fidelity (within 30 days before or after) creates a wash sale because they're identical funds, regardless of the fund families. If it were that easy, there wouldn't be the amount of posts each day on bogleheads asking "Did I just mess up my TLH?"

There is no clear factual guidance what constitutes 'substantially identical' in TLH'ing mutual funds. A consensus on a particular web forum that buying and selling S&P500 index funds from different providers is a wash sale doesn't make it the actual fact. That can only be known if the IRS issues more guidance, makes a finding for one taxpayer which the taxpayer doesn't challenge but later writes about, or such a taxpayer takes the IRS to court and either loses or wins. There's no evidence of any of those on this question AFAIK.

This piece by Vanguard, now removed from their site, but which can be seen with wayback machine said 'highest risk' category for wash sale included MF and ETF on the same index by same provider, 'higher risk' included same exact index, different provider.
https://advisors.vanguard.com/insights/ ... harvesting

This piece suggests adopting the 70% overlap rule for 'substantially related' for staddles (but S&P500, Russell 1k and even total US market would probably all be 'substantially identical' with this method, I don't buy it)
https://www.morningstar.com/articles/10 ... -identical

This author believes daily return correlation '>.95 and especially .99+ difficult to argue not substantially identical'
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/

These authors are probably all reasonable and knowledgeable, but they are guessing, not explaining known, clear rules. And note the only specific mention of mutual funds by the IRS wrt wash sales AFAIK was the statement in now discontinued Pub 564:
"Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund".
https://www.irs.gov/pub/irs-prior/p564--2009.pdf
But among the reasons for discontinuing the pub could have been things in it that were out of date, like the perhaps the assumption that 'ordinarily' mutual funds were actively managed and didn't have very similar holdings. Then again, I think it's worth pointing out the IRS's only specific statement, though perhaps obsolete, does not support a conservative interpretation of 'substantially identical'. I do think the Vanguard piece is reasonable to say that same exact index different provider is relatively more likely to be found WS than say similar but not same index, different provider, etc. But reporting same index different provider as non-wash can't be shown to be illegal, therefore IMO ethics don't demand not doing it. It really comes down to how much the prospect of possible challenge by the IRS upsets a given person, IMO. Any penalty/interest times the probability of it happening is going to be small, the IRS thoroughly audits a very small % of returns by non-super rich people or other special categories (cash business, etc.). And there's no realistic possibility of going to jail over something like this IMO.

[Nate79]

The only IRS guidance I have seen on this topic was that two mutual funds can not be substantially identical. Anything beyond that is pure conjecture.

[toddthebod]

This author believes daily return correlation '>.95 and especially .99+ difficult to argue not substantially identical'
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/

By that logic, an S&P 500 fund and a Total US Market fund would be substantially identical.

[Kevin M]

Doesn't matter what you think. What matters is what the IRS thinks.

+1 to this, and to everything else WCI wrote. That's exactly the way I look at it.

[mega317]

But among the reasons for discontinuing the pub could have been things in it that were out of date, like the perhaps the assumption that 'ordinarily' mutual funds were actively managed and didn't have very similar holdings.

Yeah. Someone posted in the last few days or weeks that the removal of pub 564 shows the IRS no longer believes it to be true. I think that's a leap, but certainly the absence of the language means we can no longer rely on that language. I would also posit that what was "ordinary" at the time that was written is no longer ordinary. Back then there weren't 100 funds at different companies, easily accessible at any brokerage, that were so close.

But reporting same index different provider as non-wash can't be shown to be illegal, therefore IMO ethics don't demand not doing it.

Well laws are just made up. Anything can be shown to be illegal unless there is specific precedent (and even then!). If the IRS took you to court and said swapping VTI for SPY or something violated the spirit of the law you could lose that case and then it would forevermore be clearly illegal. Ethically the counter argument would be that all of this TLH business violates the spirit of the law.

I just wanted to make those points but I basically agree with your whole post.

Maybe one day there will be a bill that does for TLH partners what the TCJA did for backdoor Roth.

[mega317]

The only IRS guidance I have seen on this topic was that two mutual funds can not be substantially identical. Anything beyond that is pure conjecture.

That's historical. You could act on it because we have nothing better, or you could ignore it because it's gone. Neither path is wrong.

This author believes daily return correlation '>.95 and especially .99+ difficult to argue not substantially identical'
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/

By that logic, an S&P 500 fund and a Total US Market fund would be substantially identical.

Certainly they could be if you're interested in the spirit of the rules.

Doesn't matter what you think. What matters is what the IRS thinks.

+1 to this, and to everything else WCI wrote. That's exactly the way I look at it.

Sure but we don't know what the IRS thinks. So you need to use something else to guide your actions.

"What the IRS thinks" may not even be thing. Is there anyone working at the IRS who gives any thought to this whole TLH partner thing? The IRS may not think anything at all about it. I would have to imagine at some point a Boglehead would have appeared to say I know someone at the IRS and this is what they said.

[Nate79]

The only IRS guidance I have seen on this topic was that two mutual funds can not be substantially identical. Anything beyond that is pure conjecture.

That's historical. You could act on it because we have nothing better, or you could ignore it because it's gone. Neither path is wrong.

This author believes daily return correlation '>.95 and especially .99+ difficult to argue not substantially identical'
https://www.kitces.com/blog/the-wash-sa ... -and-etfs/

By that logic, an S&P 500 fund and a Total US Market fund would be substantially identical.

Certainly they could be if you're interested in the spirit of the rules.

Doesn't matter what you think. What matters is what the IRS thinks.

+1 to this, and to everything else WCI wrote. That's exactly the way I look at it.

Sure but we don't know what the IRS thinks. So you need to use something else to guide your actions.

"What the IRS thinks" may not even be thing. Is there anyone working at the IRS who gives any thought to this whole TLH partner thing? The IRS may not think anything at all about it. I would have to imagine at some point a Boglehead would have appeared to say I know someone at the IRS and this is what they said.

Considering all the IRS audits that have happened validating that the IRS still considers 2 different mutual funds as not being substantially identical (along with 401k accounts I night add) is good enough for me.

[mega317]

Considering all the IRS audits that have happened validating that the IRS still considers 2 different mutual funds as not being substantially identical (along with 401k accounts I night add) is good enough for me.

There is evidence that the IRS considers 2 mutual funds from different companies not substantially identical in a situation where that might be in question? And there is evidence that, what, 401ks don't count? Please share.

[jason2459]

Doubt anyone will be audited specifically because of this. However, if audited it's up to the auditor to determine how deep they want to go.

I've been through two. Both went pretty deep. Multiple years from the audit year back several years of documents, worksheets, returns, bank statements, etc. They combed though it all. Everything was questioned. "Oh, there's $400 deposit in your bank statement from two years ago, what was it for? Where did it come from? Where's the evidence it wasn't income to be taxed?....". They are horrible to go through.

So, I personally was able to show the prospectus from each fund that was able to show different companies and in my case different indexes or methods being used. Left it at that and no other questions when showing proof of no wash sales.

It would be up to each individual auditor to accept or to continue asking questions or requesting evidence on any item.

So, would two funds that are exactly the same be ok(like VTI and VTI)? NO.

Could two funds from the same company tracking the same index be ok (like VTSAX and VTI)? I wouldn't push it.

Could two funds from the same company tracking different indexes be ok (like VOO and VTI)? Probably.

Could two funds following the same index from two different companies be ok (like VIOV and SLYV)? Maybe but I wouldn't push it.

Could two funds following different indexes from two different companies be ok( like VTI and ITOT)? Maybe, I did and was ok.

Could two funds with active management following similar styles/factors/industries/etc from two different companies be ok (like DFSV and AVUV)? Probably.

There is no clear guidelines what so ever. Above someone mentioned one publication that tried to mention mutual funds at one time but it was depreciated and no longer used for guidance. There's nothing what so ever that an auditor has to go with anymore regarding mutual funds or ETFs.

So, the more different you can show something is right away the better and fewer questions. The fewer questions the better.

[dbr]

Doubt anyone will be audited specifically because of this. However, if audited it's up to the auditor to determine how deep they want to go.

I've been through two. Both went pretty deep. Multiple years from the audit year back several years of documents, worksheets, returns, bank statements, etc. They combed though it all. Everything was questioned. "Oh, there's $400 deposit in your bank statement from two years ago, what was it for? Where did it come from? Where's the evidence it wasn't income to be taxed?....". They are horrible to go through.

So, I personally was able to show the prospectus from each fund that was able to show different companies and in my case different indexes or methods being used. Left it at that and no other questions when showing proof of no wash sales.

Did those auditors specifically challenge you to demonstrate that you did not have wash sales or did you simply volunteer documentation? Did the auditors state any specific criteria that had to be met or express any theory about what is and is not a wash sale? Or was it more the case that you provided certain documentation you had and they didn't go down that path?

[happysteward]

I've been through two. Both went pretty deep. Multiple years from the audit year back several years of documents, worksheets, returns, bank statements, etc. They combed though it all. Everything was questioned. "Oh, there's $400 deposit in your bank statement from two years ago, what was it for? Where did it come from? Where's the evidence it wasn't income to be taxed?....". They are horrible to go through.

Wow, thanks for this information from experience….

[JackoC]

But among the reasons for discontinuing the pub could have been things in it that were out of date, like the perhaps the assumption that 'ordinarily' mutual funds were actively managed and didn't have very similar holdings.

Yeah. Someone posted in the last few days or weeks that the removal of pub 564 shows the IRS no longer believes it to be true. I think that's a leap, but certainly the absence of the language means we can no longer rely on that language. I would also posit that what was "ordinary" at the time that was written is no longer ordinary. Back then there weren't 100 funds at different companies, easily accessible at any brokerage, that were so close.

But reporting same index different provider as non-wash can't be shown to be illegal, therefore IMO ethics don't demand not doing it.

Well laws are just made up. Anything can be shown to be illegal unless there is specific precedent (and even then!). If the IRS took you to court and said swapping VTI for SPY or something violated the spirit of the law you could lose that case and then it would forevermore be clearly illegal. Ethically the counter argument would be that all of this TLH business violates the spirit of the law.

I just wanted to make those points but I basically agree with your whole post.

Maybe one day there will be a bill that does for TLH partners what the TCJA did for backdoor Roth.

I generally agree except to clarify two of my previous points:
1. it's true anyone can *claim* or *imply* something not clearly legal is illegal. When I said 'show it's illegal' I mean to a high standard of proof. Not 'well, the IRS *could* say...'. It doesn't have to be 100% proof (eg. 'my friend has a side job where she gets paid in cash, she doesn't report it'...that's certainly illegal), but high. There's nothing like that level of proof to say it's illegal to TLH with S&P index funds from different providers.*
2. I don't believe legality and ethics are distinguishable when it comes to tax (though they are distinguishable in various other issues in life). Show me a tax maneuver is illegal and I'll automatically accept it's unethical. If you can't show me it's illegal, I don't accept that it's unethical. The only ethical duty IMO with tax is to follow the law.

*though when I've TLH'd similar funds I've chosen ones more different than that, because it was easy to.

[rkhusky]

I use 1-3 Treasury ETF's in taxable accounts as "cash" accumulators (SCHO and VGSH). For purposed of wash sales are these substantially identical?

Both use the Bloomberg (Barclay's?) US Treasury 1-3 Index. (Morningstar omits the Barclay's from their writeup for the Schwab ETF.)

I note that the Schwab and Vanguard sites say that the funds seek to track the performance of the Bloomberg US Treasury 1-3 Year Index, not seek to match the holdings of the index. According to the Supreme Court, the IRS cannot rule that two investments are substantially identical by claiming they are "economic substitutes".

[jason2459]

Doubt anyone will be audited specifically because of this. However, if audited it's up to the auditor to determine how deep they want to go.

I've been through two. Both went pretty deep. Multiple years from the audit year back several years of documents, worksheets, returns, bank statements, etc. They combed though it all. Everything was questioned. "Oh, there's $400 deposit in your bank statement from two years ago, what was it for? Where did it come from? Where's the evidence it wasn't income to be taxed?....". They are horrible to go through.

So, I personally was able to show the prospectus from each fund that was able to show different companies and in my case different indexes or methods being used. Left it at that and no other questions when showing proof of no wash sales.

Did those auditors specifically challenge you to demonstrate that you did not have wash sales or did you simply volunteer documentation? Did the auditors state any specific criteria that had to be met or express any theory about what is and is not a wash sale? Or was it more the case that you provided certain documentation you had and they didn't go down that path?

Never volunteered a thing and neither should anyone. Only what's specifically asked for or questioned to show evidence. Fine tooth comb. They went through broker statements and the return and asked to see anything showing that what I showed for a loss were not effected by a wash sale. I printed out the prospectus of my funds and highlighted the differences.

They gave no criteria of what they were looking for at all. This was the case for pretty much everything. If I showed them something it was either "great let's move on" or hmmm... Ok, let me see evidence of this now.

For what I showed for the wash sales it was a Great let's move on.

[rkhusky]

Also note that the burden of proof is on the taxpayer to show that a deduction is legitimate. It's not up to the IRS to show that it is not legitimate. The IRS publications are just guidance for filling out your tax forms. They are no substitute for the law (but generally represent the IRS's position on the law quite well).

[dbr]

Doubt anyone will be audited specifically because of this. However, if audited it's up to the auditor to determine how deep they want to go.

I've been through two. Both went pretty deep. Multiple years from the audit year back several years of documents, worksheets, returns, bank statements, etc. They combed though it all. Everything was questioned. "Oh, there's $400 deposit in your bank statement from two years ago, what was it for? Where did it come from? Where's the evidence it wasn't income to be taxed?....". They are horrible to go through.

So, I personally was able to show the prospectus from each fund that was able to show different companies and in my case different indexes or methods being used. Left it at that and no other questions when showing proof of no wash sales.

Did those auditors specifically challenge you to demonstrate that you did not have wash sales or did you simply volunteer documentation? Did the auditors state any specific criteria that had to be met or express any theory about what is and is not a wash sale? Or was it more the case that you provided certain documentation you had and they didn't go down that path?

Never volunteered a thing and neither should anyone. Only what's specifically asked for or questioned to show evidence. Fine tooth comb. They went through broker statements and the return and asked to see anything showing that what I showed for a loss were not effected by a wash sale. I printed out the prospectus of my funds and highlighted the differences.

They gave no criteria of what they were looking for at all. This was the case for pretty much everything. If I showed them something it was either "great let's move on" or hmmm... Ok, let me see evidence of this now.

For what I showed for the wash sales it was a Great let's move on.

Thanks. Helpful to hear the experience.

[JackoC]

Doesn't matter what you think. What matters is what the IRS thinks.

+1 to this, and to everything else WCI wrote. That's exactly the way I look at it.

Kind of goes in circle though if 'what the IRS thinks' is just what you think the IRS thinks. I gave examples of articles with different ideas, as noted the more conservative ones would probably say any two index mutual funds on any broad US stock index (70% overlap of holdings or .95+ daily return correlation) were 'substantially identical'. I don't see a reason to be bound by that given those authors make no claim 'this is what the IRS thinks', just their guess what the IRS *might* think.

And strictly speaking what matters is 'what the IRS thinks *they will be upheld on in tax court if challenged*'. Obviously 'IRS thought' is not constrained by worry that *I* will challenge their possible treatment of me TLH'ing X and Y particular funds, but in the US system they do not an unlimited mandate to interpret statutes. The courts have the final authority and the IRS sometimes loses in court. They probably much more often let sleeping dogs on unclear points because they are insufficiently confident the unclear statute would back up their interpretation if challenged in court, and if their ruling didn't raise enough money for challenging them to be worthwhile for any taxpayer, it probably wouldn't be worth them bothering with it in the first place. In some other countries it actually works the way some people seem to believe it works with the IRS: the administrative agency has the final say what the statute means, and can decide that based on broad principles ('the spirit of the law'), 'that tax savings by resulted from a technicality, don't do that' and that's it. The IRS is more constrained.

[dbr]

Doesn't matter what you think. What matters is what the IRS thinks.

+1 to this, and to everything else WCI wrote. That's exactly the way I look at it.

Kind of goes in circle though if 'what the IRS thinks' is just what you think the IRS thinks. I gave examples of articles with different ideas, as noted the more conservative ones would probably say any two index mutual funds on any broad US stock index (70% overlap of holdings or .95+ daily return correlation) were 'substantially identical'. I don't see a reason to be bound by that given those authors make no claim 'this is what the IRS thinks', just their guess what the IRS *might* think.

And strictly speaking what matters is 'what the IRS thinks *they will be upheld on in tax court if challenged*'. Obviously 'IRS thought' is not constrained by worry that *I* will challenge their possible treatment of me TLH'ing X and Y particular funds, but in the US system they do not an unlimited mandate to interpret statutes. The courts have the final authority and the IRS sometimes loses in court. They probably much more often let sleeping dogs on unclear points because they are insufficiently confident the unclear statute would back up their interpretation if challenged in court, and if their ruling didn't raise enough money for challenging them to be worthwhile for any taxpayer, it probably wouldn't be worth them bothering with it in the first place. In some other countries it actually works the way some people seem to believe it works with the IRS: the administrative agency has the final say what the statute means, and can decide that based on broad principles ('the spirit of the law'), 'that tax savings by resulted from a technicality, don't do that' and that's it. The IRS is more constrained.

Maybe more accurately it is what the IRS does, and at this time there is evidently no enforcement of any wash sales for different mutual funds. There is a post above about an audit experience but the result did not include any imposition of a loss disallowance for mutual funds nor the statement of any criteria used by the auditors.

The real trick here would be to get the IRS into court and force them to impose a loss disallowance rather than to get into court to get out of one.

[JackoC]

Also note that the burden of proof is on the taxpayer to show that a deduction is legitimate. It's not up to the IRS to show that it is not legitimate. The IRS publications are just guidance for filling out your tax forms. They are no substitute for the law (but generally represent the IRS's position on the law quite well).

The burden of proof is on the taxpayer to show an event reported on their tax return actually happened. There is no presumption in either direction when a taxpayer challenges an IRS ruling as to what the law *is* in tax court. If an individual chooses not to challenge because it's not worth it for the money involved that's not matter of burden of proof. If somebody has a lot riding on it their decision to challenge should only be based on who has the better case based on what the statute says and previous case law, there's no burden of proof advantage for the IRS if it gets to that point.

[AnEngineer]

I use 1-3 Treasury ETF's in taxable accounts as "cash" accumulators (SCHO and VGSH). For purposed of wash sales are these substantially identical?

Both use the Bloomberg (Barclay's?) US Treasury 1-3 Index. (Morningstar omits the Barclay's from their writeup for the Schwab ETF.)

I note that the Schwab and Vanguard sites say that the funds seek to track the performance of the Bloomberg US Treasury 1-3 Year Index, not seek to match the holdings of the index. According to the Supreme Court, the IRS cannot rule that two investments are substantially identical by claiming they are "economic substitutes".

Can you share details? The way you say it makes it sound like it would easily resolve these discussions.

[Buford T Justice]

With comparing bonds for substantially identical I compare yield and average maturity.

[rkhusky]

I use 1-3 Treasury ETF's in taxable accounts as "cash" accumulators (SCHO and VGSH). For purposed of wash sales are these substantially identical?

Both use the Bloomberg (Barclay's?) US Treasury 1-3 Index. (Morningstar omits the Barclay's from their writeup for the Schwab ETF.)

I note that the Schwab and Vanguard sites say that the funds seek to track the performance of the Bloomberg US Treasury 1-3 Year Index, not seek to match the holdings of the index. According to the Supreme Court, the IRS cannot rule that two investments are substantially identical by claiming they are "economic substitutes".

Can you share details? The way you say it makes it sound like it would easily resolve these discussions.

No easy resolution as far as I can tell because there is no definite guidance on exactly how close is close for substantially identical. We just have hints.

I note that Vanguard's stock funds also use the language that they seek to track the performance of the index. VTSAX uses a sampling approach (mainly for small stocks I presume), while 500 Index uses a full replication approach. You have to look under the hood.

And I am not sure how to judge bond funds as to what's under the hood. For stock funds it seems like shares with the same ticker are the same. But a bond from the same source can have many variations - maturity date, interest rate, etc.

The Supreme Court case is here: https://supreme.justia.com/cases/federal/us/499/554/

[mega317]

I printed out the prospectus of my funds and highlighted the differences.

They gave no criteria of what they were looking for at all. This was the case for pretty much everything. If I showed them something it was either "great let's move on" or hmmm... Ok, let me see evidence of this now.

For what I showed for the wash sales it was a Great let's move on.

What were the auditor's words? Something along the lines of "I see you claimed a loss here and on the same day bought this other fund, show me they are not substantially identical"? You actually pointed to specific elements (which elements?) of the prospectus and the response was "great let's move on"? This is critical information for the Bogleheads, the more specific on the language used the better. And which funds?

[jason2459]

I printed out the prospectus of my funds and highlighted the differences.

They gave no criteria of what they were looking for at all. This was the case for pretty much everything. If I showed them something it was either "great let's move on" or hmmm... Ok, let me see evidence of this now.

For what I showed for the wash sales it was a Great let's move on.

What were the auditor's words? Something along the lines of "I see you claimed a loss here and on the same day bought this other fund, show me they are not substantially identical"? You actually pointed to specific elements (which elements?) of the prospectus and the response was "great let's move on"? This is critical information for the Bogleheads, the more specific on the language used the better. And which funds?

I claimed losses and they examined the broker statements. They wanted evidence to show the losses were not a wash.

I showed the prospectus of several funds all showing different indexes, companies and styles between them. The one of most interest here would be my sell of VTI/VXUS and buying of ITOT/IXUS as they both have the objective of being total market. I also had recuring buys of FXAIX. I highlighted that they were all from different providers and followed different indexes.

He didn't say much other then move on to the next question.

[fyre4ce]

I printed out the prospectus of my funds and highlighted the differences.

They gave no criteria of what they were looking for at all. This was the case for pretty much everything. If I showed them something it was either "great let's move on" or hmmm... Ok, let me see evidence of this now.

For what I showed for the wash sales it was a Great let's move on.

What were the auditor's words? Something along the lines of "I see you claimed a loss here and on the same day bought this other fund, show me they are not substantially identical"? You actually pointed to specific elements (which elements?) of the prospectus and the response was "great let's move on"? This is critical information for the Bogleheads, the more specific on the language used the better. And which funds?

I claimed losses and they examined the broker statements. They wanted evidence to show the losses were not a wash.

I showed the prospectus of several funds all showing different indexes, companies and styles between them. The one of most interest here would be my sell of VTI/VXUS and buying of ITOT/IXUS as they both have the objective of being total market. I also had recuring buys of FXAIX. I highlighted that they were all from different providers and followed different indexes.

He didn't say much other then move on to the next question.

Just curious, were these two "deep" audits triggered by anything in particular, that you were aware of? Or were they apparently random? I thought usually if the IRS audits for a particular issue it tends to be narrow in scope on just that issue and maybe some adjacent questions. Although I understand the IRS also does sets of random audits looking through people's returns in extreme detail, to see where people are statistically skirting the rules, and to inform enforcement strategies.

[jason2459]

I printed out the prospectus of my funds and highlighted the differences.

They gave no criteria of what they were looking for at all. This was the case for pretty much everything. If I showed them something it was either "great let's move on" or hmmm... Ok, let me see evidence of this now.

For what I showed for the wash sales it was a Great let's move on.

What were the auditor's words? Something along the lines of "I see you claimed a loss here and on the same day bought this other fund, show me they are not substantially identical"? You actually pointed to specific elements (which elements?) of the prospectus and the response was "great let's move on"? This is critical information for the Bogleheads, the more specific on the language used the better. And which funds?

I claimed losses and they examined the broker statements. They wanted evidence to show the losses were not a wash.

I showed the prospectus of several funds all showing different indexes, companies and styles between them. The one of most interest here would be my sell of VTI/VXUS and buying of ITOT/IXUS as they both have the objective of being total market. I also had recuring buys of FXAIX. I highlighted that they were all from different providers and followed different indexes.

He didn't say much other then move on to the next question.

Just curious, were these two "deep" audits triggered by anything in particular, that you were aware of? Or were they apparently random? I thought usually if the IRS audits for a particular issue it tends to be narrow in scope on just that issue and maybe some adjacent questions. Although I understand the IRS also does sets of random audits looking through people's returns in extreme detail, to see where people are statistically skirting the rules, and to inform enforcement strategies.

I got a letter both times claiming they were random. Don't know how I luckily got randomly picked twice in the same decade. Seemed suspicious to me but maybe that was my lottery winning event of a lifetime.

[jason2459]

Here's the start of the letter I got...

Your federal income tax return for the year shown above was selected at random for a compliance research examination. We must examine randomly-selected tax returns to better understand tax compliance and improve the fairness of the tax system. We'll give you the opportunity to explain any errors we may find during the examination.
The results of this and other compliance research examinations will improve our efforts to help taxpayers understand and follow the tax law. It will also reduce unnecessary and costly examinations, and reduce burden on taxpayers. Please read the enclosed Notice 1332, Why Your Return is Being Examined.

And went on to tell me to contact the auditor assigned by a certain date to setup the meetings. It was several meetings of several hours each.

When I got that same damn letter a second time like 7 years later I was like you have got to be F'n kidding me! No way this is random! I was pretty pissed off.

So, to everyone else out there, you're welcome I guess.

[Kevin M]

<snip>

When I got that same damn letter a second time like 7 years later I was like you have got to be F'n kidding me! No way this is random! I was pretty pissed off.

So, to everyone else out there, you're welcome I guess.

Thanks for your service

And seriously, thanks for sharing your experience here.

Kevin

[jgalt133]

And went on to tell me to contact the auditor assigned by a certain date to setup the meetings. It was several meetings of several hours each.

Wow, thank you for sharing your experience. It's the first time I've heard of an audit where TLH was reviewed. Was this in person or over the phone?

[jason2459]

And went on to tell me to contact the auditor assigned by a certain date to setup the meetings. It was several meetings of several hours each.

Wow, thank you for sharing your experience. It's the first time I've heard of an audit where TLH was reviewed. Was this in person or over the phone?

All meetings were in person.