Tax Loss Harvesting - Similar Fund?

[Looking4Ward]

I've been holding Vanguard Energy (VGELX) in my taxable account for over a year and it currently has a $20K loss.

I personally don't think we'll see energy improving much over the next quarter so I've been thinking of doing my first ever TLH so that I can offset other CG gains and tIRA to Roth conversions this year.

If I understand the process correctly, I can sell this fund at a $20K CG loss and move the proceeds into a similar but not like fund.

If that's true, what "similar" energy fund could I move the proceeds into? Or would it be better to keep the proceeds in my cash broker account and wait the 31 days (actually 60 per VG's policies) and then put it back into VGELX?

 

[gcgang]

Pretty much any fund that's not VGELX.

XES or XLE are a couple you could research.


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[travelover]

People seems to get all tied up in knots over over the definition of a wash sale, but I doubt that the IRS would ever question it unless it was exactly the same stock or fund.

 

[Looking4Ward]

Thanks. I realized that while my Vanguard Energy fund is the admiral version the balance dropped below $50K long ago and is no longer high enough to buy back in as admiral later.

So what I can do is sell VGELX today, realize a TLH of $20K, and at day 31 put the proceeds back into the investor class energy fund VGENX. That would also circumvent the VG frequent trader 60 day policy, a moot point now anyway since I wouldn't have enough to get back into admiral. If/when VGENX recovers VG will automatically reclassify it as admiral anyway.

The only decision I'm left with is whether or not to trade the VGELX into my money market fund (cash) or exchange it into Vanguard Health VGHAX for a month or two and possibly realize a point or two gain. Or loss.

 

[Animorph]

Pretty much any fund that's not VGELX.

XES or XLE are a couple you could research.


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+1

I would sell VGELX and buy XLE or something similar. That should track VGELX well enough to capture any big moves. After 30 days plus any Vanguard trading restriction period you can sell the XLE and buy VGENX.

 

[pb4uski]

+2 if you want to stay with the same allocation to energy the entire time.

 

[sengsational]

Since it's your first TLH, you do know that you only get to offset $3,000 of gains per year, don't you?

People seems to get all tied up in knots over over the definition of a wash sale, but I doubt that the IRS would ever question it unless it was exactly the same stock or fund.

Yeah, There are things they'll catch really easily, and then there are things that the pointy head lawyers might have a slightly different opinion about. I take the opinion that benefits me and never think about it again. We're usually talking about pocket change anyway.

 

[GrayHare]

Since it's your first TLH, you do know that you only get to offset $3,000 of gains per year, don't you?

More precisely, a maximum of $3000 of *ordinary income*, such as conversions to Roth, can be offset. *Capital gains* can be offset all the way up to the complete TLH (and other capital loses).

 

[Alan]

Since it's your first TLH, you do know that you only get to offset $3,000 of gains per year, don't you?

That is only against income I believe.

If one has a $25k gain and a $20k loss then the whole $20k loss WILL be offset against the gain. Similary if losses are carried forward then in subsequent years losses carried over will first be offset against realized gains before regular income.

At least I think that is how it works.

ETA
GrayHare beat me to it.

 

[Looking4Ward]

That is only against income I believe.

If one has a $25k gain and a $20k loss then the whole $20k loss WILL be offset against the gain. Similary if losses are carried forward then in subsequent years losses carried over will first be offset against realized gains before regular income.

At least I think that is how it works.

ETA
GrayHare beat me to it.

Yes, that has been my understanding as well. I'm already FIRE'd and have no regular income this year so I would be using the entire loss to offset CG and tIRA to ROTH conversions. Well, it can't be used against the ROTH conversions (beyond the $3K) but wiping out much of the CG will allow me to convert more to ROTH with $0 taxes due.

 

[Looking4Ward]

+1

I would sell VGELX and buy XLE or something similar. That should track VGELX well enough to capture any big moves. After 30 days plus any Vanguard trading restriction period you can sell the XLE and buy VGENX.

+2 if you want to stay with the same allocation to energy the entire time.

I like that idea, it makes better sense. Thanks.

Looks like I can't just sell the VGELX and buy the XLE, I'll have to sell the VGELX to my VG money market account, and then buy XLE from the money market account. Can't recall having ever done a transaction just like that so I guess I'll see if they both close on the same day or if there is a spread.

 

[NW-Bound]

People seems to get all tied up in knots over over the definition of a wash sale, but I doubt that the IRS would ever question it unless it was exactly the same stock or fund.

+1

My brokerage computer would catch an identical stock or ETF wash sales and note that in its statement. But the definition of "substantially identical" security is not precise enough to automate identification.

I believe the language the IRS used is meant so that they could catch Warren Buffett moving $2B from XOM to COP for example. Look at the stock chart of these 2 stocks and tell me if they are not "substantially identical" over the last 5 years. If Buffett tried that, I am sure they would come after him. Small fish like us, who cares?

 

[LOL!]

XOM and COP are certainly not substantially identical. Folks have done these tax swapping things for years and years. You know Merck for Pfizer, etc.

However, different share classes of the same Vanguard fund are substantially identical and Vanguard will treat them that way for possible wash sales.

 

[NW-Bound]

OK, I stand corrected. Just because two stock prices track very well in the short term does not mean that the IRS can prevail. From a Web site:

You could, for example, sell the SPDR S&P 500 index fund at a loss, and use a big-company fund like Dodge & Cox Stock Fund to maintain your exposure to the stock market for 31 days. Investment match: very close. The Dodge & Cox fund’s R-squared statistic (which measures the extent to which its fluctuations track those of the S&P 500) is 98%. Probability of prevailing against an IRS agent who calls this a wash sale: very high, according to wash sale guru George Michaels.​

I have always thought that the wash sales rule is toothless. Why even bother to keep it on the book?

See: http://www.forbes.com/sites/baldwin/2012/06/05/wash-sale-trap-what-is-substantially-identical/.

 

[catotx]

You can use VDE if you want to stay within the Vanguard family.

 

[Looking4Ward]

You can use VDE if you want to stay within the Vanguard family.

Thank you. I was hoping there was a similar but not like fund that I could transfer directly into.

ETA: Ooops. That would still require a sell from my VG MF account to my VG MM account and then a buy from my VG brokerage account. I wonder why VG has never combined these two so that a mutual fund could be exchanged for an ETF?

 

[catotx]

Thank you. I was hoping there was a similar but not like fund that I could transfer directly into.

ETA: Ooops. That would still require a sell from my VG MF account to my VG MM account and then a buy from my VG brokerage account. I wonder why VG has never combined these two so that a mutual fund could be exchanged for an ETF?

Has your account at Vanguard been "upgraded"? With an upgraded account, you hold mutual funds and ETFs in the same account.

 

[Animorph]

I like that idea, it makes better sense. Thanks.

Looks like I can't just sell the VGELX and buy the XLE, I'll have to sell the VGELX to my VG money market account, and then buy XLE from the money market account. Can't recall having ever done a transaction just like that so I guess I'll see if they both close on the same day or if there is a spread.

That's where it is nice to have enough cash laying around so you can do a simultaneous buy and sell. Otherwise you'll need to sell VGELX, wait a day for the sale to settle, do whatever transfers you need to do, then buy XLE or whatever. That day wait expands to three days going the other direction since individual stocks and ETF's take three business days to settle.


VDE might be too similar if it is the typical Vanguard ETF share class of VGENX. If it's a straight index fund then no problem since VGENX is an active fund. Looks like VDE is more likely a share class of VENAX, the energy index fund. VENAX would be a perfect trade for you, a simple exchange and not a wash sale, except that it is Admiral class and would require that high minimum investment. I don't see an investor share class of the index fund.

 

[Looking4Ward]

Has your account at Vanguard been "upgraded"? With an upgraded account, you hold mutual funds and ETFs in the same account.

Apparently not. All of my accounts (Mutual Funds / Brokerage Accounts / tIRA / ROTH) are listed separately on the opening page and when I go to full account few they each have their own screen section. If I select "Buy/Sell" in the Mutual Fund screen and choose to sell one of my MF's, the only choices I am given are to have the proceeds deposited to a bank account or to buy another VG mutual fund. If I wanted to trade for an ETF, I would have to direct the proceeds of the sale to my MM account, then initiate a buy from the Brokerage account section of my screen and indicate that the funds will come from the MM account.

It's somewhat convoluted and has always worked that way but it hasn't been a big deal for me so far since I seldom trade around like that.

 

[Looking4Ward]

That's where it is nice to have enough cash laying around so you can do a simultaneous buy and sell. Otherwise you'll need to sell VGELX, wait a day for the sale to settle, do whatever transfers you need to do, then buy XLE or whatever. That day wait expands to three days going the other direction since individual stocks and ETF's take three business days to settle.


VDE might be too similar if it is the typical Vanguard ETF share class of VGENX. If it's a straight index fund then no problem since VGENX is an active fund. Looks like VDE is more likely a share class of VENAX, the energy index fund. VENAX would be a perfect trade for you, a simple exchange and not a wash sale, except that it is Admiral class and would require that high minimum investment. I don't see an investor share class of the index fund.

Yeah, I'm starting to think simple would be best here and to just sell the VGELX shares, hold the cash for 31 days and then buy VGENX since I wouldn't have enough to get back in at admiral level. I'm probably wrong but I figure there isn't going to be much upwards movement in energy over the month or so anyway.

 

[statsman]

Yeah, I'm starting to think simple would be best here and to just sell the VGELX shares, hold the cash for 31 days and then buy VGENX since I wouldn't have enough to get back in at admiral level. I'm probably wrong but I figure there isn't going to be much upwards movement in energy over the month or so anyway.

I'm curious what you finally decided to do and when. On 8/27, the day of your last post on this thread, VGELX ended the day at $83.37. After 31 days, the next trade day (9/28) VGELX ended the day at $77.61, another drop of 7%.

Switching to investor shares, VGENX on 9/28 was $41.34, and as of Wednesday (11/25), it was $46.93 or a gain of 13.5% from 9/28. If you did take the loss on 8/27 and re-invested on 9/28, you timed it pretty well!

Sorry, I was researching the concept of wash sales, and I came across your thread.