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Question Regarding Wash Sale Rule
Old 05-02-2011, 10:40 AM   #1
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Question Regarding Wash Sale Rule

I am reading The Boglehead's Guide to Retirement Planning. In the book, the concept of a wash sale is addressed. I am trying to understand and apply the concept to specific transactions that I recently made.

I recently sold Invesco/AIM Value Equity Fund LCINX and Janus 20 Fund JNTFX. I sold them both at a loss.

If I purchase Vanguard's 500 Index Fund VFINX, within 31 days from the date that I sold LCINX and JNTFX would that invoke the wash sale rule for either the LCINX or the JNTFX transactions?

If I wait over 31 days to purchase VFINX, will I then avoid the wash sale rule regardless of whether LCINX and JNTFX are considered substantially similar to VFINX?

Thank you for your advice.
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Old 05-02-2011, 10:55 AM   #2
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From everything I have read/heard etc.... substantially similar has to be very substantial...

IOW, if you sell one S&P 500 fund and buy another (say sell Fidelity and buy Vanguard).. this might qualify... to be safe wait the 31 days...

If it is an active managed fund that you sell, buying any other fund besides that one is not substantial similar... so go ahead and buy...

PS... a different class of the same fund is substantially similar..
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Old 05-02-2011, 11:29 AM   #3
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Quote:
Originally Posted by midnighter777 View Post
I am reading The Boglehead's Guide to Retirement Planning. In the book, the concept of a wash sale is addressed. I am trying to understand and apply the concept to specific transactions that I recently made.

I recently sold Invesco/AIM Value Equity Fund LCINX and Janus 20 Fund JNTFX. I sold them both at a loss.

If I purchase Vanguard's 500 Index Fund VFNIX, within 31 days from the date that I sold LCINX and JNTFX would that invoke the wash sale rule for either the LCINX or the JNTFX transactions?
No wash sale. Go ahead. These funds are not alike in any way.

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If I wait over 31 days to purchase VFNIX, will I then avoid the wash sale rule regardless of whether LCINX and JNTFX are considered substantially similar to VFNIX?
Yes
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Old 05-03-2011, 06:37 AM   #4
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No wash sale. Go ahead. These funds are not alike in any way.

Yes
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Old 05-03-2011, 08:04 AM   #5
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What about components of an index.....eg. say I own an index S&P 500 fund.
I sell at a loss and immediately buy, in a 1:1 ratio from the same family,
S&P 500 value and S&P 500 growth funds?
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Old 05-03-2011, 08:20 AM   #6
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What about components of an index.....eg. say I own an index S&P 500 fund.
I sell at a loss and immediately buy, in a 1:1 ratio from the same family,
S&P 500 value and S&P 500 growth funds?
Oh, oh oh, I like that, some sharp thinking there kaneohe. Probably OK, I'll wait for the experts, but it seems to meet the mental test I use. It does mean managing an additional fund and I am always trying to reduce the number of finds and simplify things but this sounds like a legitimate approach which could help with tax loss harvesting while maintaining your AA in your portfolio.
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Old 05-03-2011, 08:57 AM   #7
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Originally Posted by kaneohe View Post
What about components of an index.....eg. say I own an index S&P 500 fund.
I sell at a loss and immediately buy, in a 1:1 ratio from the same family,
S&P 500 value and S&P 500 growth funds?
This would not be considered a wash sale.
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Old 05-03-2011, 09:47 AM   #8
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The correct answer is there is no answer. Congress has never defined "substantially similar". They make the laws, and to subject people to vague descriptions shows that Congress is incompetent at making laws.

There should be one obvious correct answer.

I see this as a violation of the "ignorance is no excuse" rule that is applied to all of us. To say that the average citizen cannot use ignorance as an excuse requires laws that can be understood by the average citizen. If even the people who wrote the law cannot define what it means, how can the average person NOT be ignorant of what it means?

I don't know if the "ignorance is no excuse" is codified, or just a principal from earlier legal systems that we adopted. But it is used (and it makes sense to require it). And I do feel it demands that laws applied to average people be understandable by average people.

Do whatever makes sense to you, and use the "Geithner defense" if you get audited.

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Old 05-03-2011, 10:19 AM   #9
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Originally Posted by kaneohe View Post
What about components of an index.....eg. say I own an index S&P 500 fund.
I sell at a loss and immediately buy, in a 1:1 ratio from the same family,
S&P 500 value and S&P 500 growth funds?
My guess is that the IRS would likely view the new holdings as being substantially identical to the holding that was sold and would deny the loss.
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Old 05-03-2011, 11:10 AM   #10
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My guess is that the IRS would likely view the new holdings as being substantially identical to the holding that was sold and would deny the loss.
well, then suppose instead of buying a 1:1 ratio (growth:value), I buy
1.xx:1.00..........at what pt .xx would they be different than substantially identical?
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Old 05-03-2011, 11:45 AM   #11
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Practically speaking has anyone (I mean small investors) ever been called on violating this rule?
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Old 05-03-2011, 11:46 AM   #12
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Interesting question on the S&P splitting it up....

I would agree that buying two mutual funds that are identical to one would fall under the wash sell rules....

If you look at the second link, I think his take is closer to what the IRS would view. He was talking about selling one S&P 500 and buying another...:

"My feeling is that those differences aren't enough to prevent the two funds from being substantially identical. The point of the wash sale rule is to determine whether you've changed your position relative to the market. If you can lay the price graph for your new investment on top of the price graph for the old one and never see a significant disparity (as would be the case for two high quality S&P 500 funds), the investments should be considered substantially identical for purposes of the wash sale rule."



Here is a source that explains them...

Wash Sales 101

With the definition of substantial similar...

Substantially Identical Securities
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Old 05-03-2011, 11:54 AM   #13
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well, then suppose instead of buying a 1:1 ratio (growth:value), I buy
1.xx:1.00..........at what pt .xx would they be different than substantially identical?
See ERD50's response above. There is no specific answer. It is a matter of judgement - if you are examined and the IRS examiner agrees with your judgement you are all set, if s/he doesn't then you'll have an issue to be resolved.
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Old 05-03-2011, 12:03 PM   #14
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Originally Posted by kaneohe View Post
What about components of an index.....eg. say I own an index S&P 500 fund.
I sell at a loss and immediately buy, in a 1:1 ratio from the same family,
S&P 500 value and S&P 500 growth funds?
This is a tough call. The IRS could look at this and decide that the *composite* new purchases are "substantially identical" to what you sold at a loss even if no individual security you purchased was "substantially identical" to what you sold. It might pass muster but I don't think I'd push it to this extent.

Now if you owned only the value component and sold it to buy the growth component, those are pretty clearly not "substantially identical" and I'm pretty confident no wash sale has occurred.

One of the problems with the IRS definition of "wash sale" is that it leaves a gray area; it's not always obvious when something is or is not a wash sale. Frankly I would stay away from the gray areas and assume they are wash sales, since I want no part of IRS problems.
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Old 05-03-2011, 02:05 PM   #15
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Please do not confuse "substantially similar" with "substantially identical". They are quite a bit different.

For example, VWO and EEM are substantially similar, but they are not substantially identical.
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Old 05-03-2011, 02:29 PM   #16
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Please do not confuse "substantially similar" with "substantially identical". They are quite a bit different.

For example, VWO and EEM are substantially similar, but they are not substantially identical.
what are the IRS rules? substantially similar/identical permitted/not permitted?
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Old 05-03-2011, 02:35 PM   #17
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Please do not confuse "substantially similar" with "substantially identical". They are quite a bit different.

For example, VWO and EEM are substantially similar, but they are not substantially identical.
You are correct. I'm afraid that I started that confusion by using the wrong term. It should be substantially identical.
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Old 05-03-2011, 05:52 PM   #18
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The IRS has not defined wash with greater detail or precision, is not likely to and really has no need. Greater detail often creates as many problems as it resolves.

The S&P 500 value index and the S&P 500 growth index are not mutually exclusive. S&P component equities are not assigned uniquely to one or the other. About 1/3 of equities are assigned to growth, 1/3 to value and 1/3 are shared. allocated by methodology. Combined, the indexes are intended to track the S&P but they are not exclusive subsets, there is substantial overlap.

If all S&P components were cleanly split and weighted when allocated the sum of the two might be “substantially similar”, but they are not.
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