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How does one know what constitutes substantially identical for avoiding wash sale
Old 07-02-2010, 12:20 PM   #1
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How does one know what constitutes substantially identical for avoiding wash sale

How does one determine what constitutes substantially identical investments (in IRS eyes) so as to avoid wash sale problem when tax loss harvesting, but reinvesting in something else at the same time? Are there clear IRS or other guidelines posted somewhere to determine how much difference is enough of a difference? For example, I am thinking about selling some VG Total International (VGTSX) and buying instead VG FTSE All-World ex-US (VFWIX). VFWIX adds a little exposure to North America that is not present in VGTSX (about 6-7 percent if I recall correctly), but the remaining regional percentages are pretty similarly proportioned between the two funds. Top ten holdings have much similarity between the two (though in different rank order) and top ten holdings represent a slightly different percentage of overall in each case. VFWIX holds a larger total number of stocks than VGTSX. Is there a quantifiable metric somewhere for this is is it just that the IRS "knows it when it sees it"? Thanks for any pointers.
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Old 07-02-2010, 12:42 PM   #2
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For example, I am thinking about selling some VG Total International (VGTSX) and buying instead VG FTSE All-World ex-US (VFWIX).
VFWIX has Canada, and VGTSX doesn't, so they aren't substantially identical.

The IRS doesn't seem to have any guidelines, beyond the traditional "We know it when we see it!", but consensus among Bogleheads, where this comes up every few weeks, is that if two active funds have different management, or two passive funds track different (even if similar) indices, they'll pass the 'substantially identical' sniff test.

Swapping between the Vanguard 500 index (VFINX) and the Schwab S&P 500 Select (SWPPX) would be treated as a 'substantially identical' move, as both track the S&P 500 index.
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Old 07-02-2010, 01:57 PM   #3
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VFWIX has Canada, and VGTSX doesn't, so they aren't substantially identical.

The IRS doesn't seem to have any guidelines, beyond the traditional "We know it when we see it!", but consensus among Bogleheads, where this comes up every few weeks, is that if two active funds have different management, or two passive funds track different (even if similar) indices, they'll pass the 'substantially identical' sniff test.

Swapping between the Vanguard 500 index (VFINX) and the Schwab S&P 500 Select (SWPPX) would be treated as a 'substantially identical' move, as both track the S&P 500 index.
+1 on this... if it is actual stock... it has to be 'the same'... in funds... as mentioned by Paquette... you can get something that is very very close... but if it is an active managed fund... then you are probably good.. an index to a different index... probably good...
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Old 07-02-2010, 05:11 PM   #4
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Thanks for the replies. Sounds like I'm good to go for this case.
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Old 07-02-2010, 06:46 PM   #5
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This has been discussed endlessly at Bogleheads. I think it is sort of like telling ghost stories around the campfire.

I may be wrong, but I've got to believe that the IRS doesn't have time to have agents running Morningstar X-Rays on funds to try to catch someone with a too similar investment.
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Old 07-02-2010, 07:15 PM   #6
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VFWIX has Canada, and VGTSX doesn't, so they aren't substantially identical.

The IRS doesn't seem to have any guidelines, beyond the traditional "We know it when we see it!", but consensus among Bogleheads, where this comes up every few weeks, is that if two active funds have different management, or two passive funds track different (even if similar) indices, they'll pass the 'substantially identical' sniff test.

Swapping between the Vanguard 500 index (VFINX) and the Schwab S&P 500 Select (SWPPX) would be treated as a 'substantially identical' move, as both track the S&P 500 index.
Interestingly my Schwab rep told me that switching from the Vanguard Total Stock Market (VTI) to the Schwab Broad Index Fund SCHB would not be treated as a wash sale since the hold different securities. I'd say with the exception of a 500 index fund which holds 500 stocks everything else is different, until the IRS says it ain't so.

But than I am in the beg forgiveness school, YMMV.
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