Tax Question: Disallowed Loss

[TromboneAl]

Last June I transferred $20,000 from the VG 500 index fund to the money market. The cost basis for those shares was $25,021.04, but the Average Cost summary that I got from VG shows a Disallowed Loss Amount of $221.50.

Question 1: why would that be disallowed? I didn't put any money into that account in 2009.

Question 2: TaxAct asks only for sales proceeds and cost basis. Do I put in $24,799.54 for the cost basis?

Thanks.

 

[MasterBlaster]

really these are questions for Vanguard.

I would guess that it's a wash sale loss where Vanguard was trading in and out of the market in less than the 30 day window.

regarding the basis - I would use what's on the Average Cost Summary

But what do I know. Perhaps other posters can enlighten us.

 

[FIREd]

Question 1: Did you reinvest dividends into the fund during the 30-day period before or after the sale? That could trigger a wash sale. It's probably what happened as this fund makes a distribution in June. To avoid that problem in the future, it might be better to have the dividends paid to a money market fund and reinvest the money manually.

Question 2: Yes, $24,799.54 is your total cost basis but you may have to figure out your short term/long term cost basis and enter those separately.

 

[TromboneAl]

Did you reinvest dividends into the fund during the 30-day period before or after the sale? That could trigger a wash sale...

Yes, that would explain it, thanks.

So, do I just use $24,799.54 for the cost basis? Note that this will make no difference in the amount of tax I pay.

 

[FIREd]

Yes, that would explain it, thanks.

So, do I just use $24,799.54 for the cost basis? Note that this will make no difference in the amount of tax I pay.

Are all the shares your sold either short term shares or long term shares, i.e. does vanguard only show a short term or long term loss for that fund? If yes, then you can use $24,799.54 as the cost basis. If it's a mixture of short term and long term losses, you have to break it down.

 

[audreyh1]

Yeah - those reinvested dividends can really get you sometimes! I have to be really careful. In general, if I expect that I'm going to sell a fund sometime soon, I turn off reinvestment to that fund.

It's been so long since I have done this, but I thought 1040 form Schedule D had a spot for the disallowed loss (wash sale) value. Maybe I'm wrong......

Audrey

 

[LOL!]

TaxAct and other software should allow you to (or it should by itself) specify the cost basis of your shares including the date acquired.


[....this paragraph may not be quite right ....][I would certainly tell TaxAct about the lot that was re-invested. It should show up on the Short-term section of Schedule D and you can (or the software should) write "Wash sale" where the loss would be.]

If all your shares sold are long-term, you could still have a wash sale. I would put one line for the non-wash-sale shares and one-line for the wash-sale shares. For the wash-sale shares you write "Wash sale" where the loss would be.

You get to add that loss to the basis of those shares purchased in that dividend re-investment, so the loss is deferred and not lost. Of course, if you sold ALL shares of the fund, then there is no wash sale and the tax software is pulling your leg.

As for recordkeeping if you have not used AverageCost basis in reporting on this fund before, then you don't need to use it this time either. Instead you can use First-In, First-Out.

This is all nicely explained by the relevant IRS publication which is well worth reading and understanding.

 

[TromboneAl]

OK, thanks for the advice. I use average cost because I have in the past. I used it in the past because it was simpler for me. Yes, they are all on the long term line.

Yes, I could break it out into wash and non-wash sales, but I think that with the single Average Cost value that I have for all those shares, I do not have enough information to break it out. That is, I know the average cost of all the shares sold, but I don't know the average costs of the wash and non-wash shares sold, respectively.

The question is, will the IRS computer see a discrepancy and become disgruntled?

Data from VG:



How I report it:

 

[FIREd]

Cost basis information is not reported to the IRS, so their computer can't see a discrepancy regarding cost basis. The sales proceed number though is reported to the IRS, so you need to make sure that number matches the 1099 form.

I too use the average cost method and I report my wash sales exactly like you did above.

 

[Alan]

OK, thanks for the advice. I use average cost because I have in the past. I used it in the past because it was simpler for me.

Yes, I could break it out into wash and non-wash sales, but I think that with the single Average Cost value that I have for all those shares, I do not have enough information to break it out. That is, I know the average cost of all the shares sold, but I don't know the average costs of the wash and non-wash shares sold, respectively.

The question is, will the IRS computer see a discrepancy and cause problems?

Data from VG:

View attachment 8461

How I report it:

View attachment 8462

Al,

A similar thing happened to me a few years ago with a VG fund. I also forgot about the auto re-investment of the dividends and ended up getting caught by the wash rules. Like you I always use the Average cost method.

The forms you display look good to me. (but I'm not a tax expert).

 

[Texas Proud]

Just to let you know.... I just ignore the small disallowed amounts like this... because I do not want to keep track of them...

I take my whole loss and will do the audit roulette... if they catch me, I will pay up the small amount...

YMMV....

 

[LOL!]

I would report it differently because you are losing the $222 in disallowed loss for future use.

I would divide the one $20,000 transaction into two transactions: One transaction not affected by the wash sale and a 2nd transaction that is the wash sale. The IRS rules are that the First shares sold apply to the wash sale, but it is not important since you are using average cost basis.

So, find out the number of shares that were purchased in the plus or minus 30-day window. This number of shares is the amount of shares for the 2nd transaction. Let's say is was 30.1 shares. The other transaction is then 236.183 - 30.1 = 206.083 shares.

So you enter 2 transactions of 206.083 (no wash sale) and 30.1 (wash sale) as per IRS instructions.

Then don't forget to add $221.50 to the cost basis of those shares purchased that caused the wash sale.

 

[clifp]

I think LOL has it exactly right and it should be easy to tell from you Vanguard Statement how many shares you bought due to dividend reinvestment.

 

[audreyh1]

I believe that is how Turbotax entered my stuff when downloaded from Fidelity - as two separate transactions.

Audrey

 

[ERD50]

Like some others, this is why I do not automatically re-invest dividends in taxable accounts. Let them accumulate and put them in where/when you want (maybe as part of a re-balance of AA). Keeps life much simpler.

The bigger story here is - the transaction that T-Al made is really very simple, and many people do re-invest dividends. Yet, I bet you'd be hard pressed to get a straight answer on this by calling the IRS. And that is just wrong (but it is the fault of Congress, more than the IRS).


-ERD50

 

[TromboneAl]

I'm getting closer, but I can't quite get the calculations right. Based on this:



I do these calculations:

Average cost/share = 25021.04/236.183 = 105.939
Average cost of wash sale shares = 105.939 * 10.419 = 1,103.78
Average cost of non wash sale shares = 105.939 * (236.183 - 10.419) = 23,997.30

Non wash sale:
# Shares = 236.183 - 10.419 = 225.764
Sales price = 225.764 * 84.6801 = 19,117.72
Cost Basis = 23,997.30
Gain or Loss = 23,997.30 - 19,117.72 = -4,879.58

Wash Sale:
Sale price = 10.419*84.6801 = 882.28
Cost basis = 1,103.78
Gain or loss = 1,103.78 - 882.28 = -221.50

The wash sale value comes out OK, but the non-wash sale loss should be -4,800, right?

The IRS form instructions say:

Enter the full amount of the (loss) in column (f). Directly below the line on which you reported the loss, enter "Wash Sale" in column (2), and enter as a positive amount in column (f) the amount of the loss not allowed."
​

So why not just do it like this?

 

[RedHawk]

I do these calculations:

Average cost/share = 25021.04/236.183 = 105.939

Non wash sale:
# Shares = 236.183 - 10.419 = 225.764
Sales price = 225.764 * 84.6801 = 19,117.72
Cost Basis = 23,997.30
Gain or Loss = 23,997.30 - 19,117.72 = -4,879.58

View attachment 8533

I think your cost basis for your non wash sale is miscalculated.

225.764 * 105.939= 23,917.21

23,917.21- 19,117.72= -$4,800

 

[LOL!]

T-Al, you can do it either way. I do like your idea to follow the IRS instructions, but then I would follow them exactly: "Wash Sale" in column (a), nothing in columns b-e, then the washed amount in column (f). That's slightly different than the pic you showed, but it probably doesn't matter.

If you use tax software, the software often asks about wash sales, what does it do?

 

[TromboneAl]

OK, thanks RedHawk, that solved it.

TaxAct didn't ask about wash sale stuff, or else I missed it.

 

[TromboneAl]

For completeness, here's the final result:

TaxAct did explain exactly how to do it, but I hadn't seen it, because that help came after the data entry part.

Thanks for the help. I will turn off reinvestment in the taxable funds so that I don't have to deal with this in the future.

 

[LOL!]

T-Al, don't forget to add that $222 to the basis of the those 10-odd shares for later use.

 

[TromboneAl]

So how does that work? Let's say I sell 100 shares this year, I will simply add $222 to the cost basis of all of those shares? Add a special Wash Sale carryover line?

 

[LOL!]

It works this way:

Since you have used average cost basis, you have to keep using average cost basis forever.

You have to trust Vanguard to include the extra $222 when calculating the average cost basis of your shares. I personally would not trust them.

If you had not been using average cost basis, then the specific shares that caused the wash sale now have a cost basis $222 higher than what you paid for them. So if the re-invested dividend was $1000 and was used to buy 10.419 shares of the fund, those specific 10.419 shares now have a cost basis of $1222.

 

[FIREd]

Alright, so I am trying to enter the wash sale the right way (as Al did in post #20).

I am using Turbo Tax Premier and I can't figure out how to enter line 2 (post#20), Wash sale.

I remember that last year, every time I entered an investment sale showing a loss, TT would ask me if I purchased identical shares during the wash sale window. This year, nothing. So, it looks like I have to do this manually. But how?

 

[TromboneAl]

Here are the instructions from TaxAct, which are pretty much the same as those that LOL gave (TaxAct doesn't allow copy/paste in their help -- you may need to click on them multiple times to make them readable):