wash sale rules

[5yearstogo]

I am thinking about realizing a large tax loss by selling my Vanguard S&P550, Vanguard mid-cap index and Vanguard small-cap index funds and replacing them with Vanguard total stock market index fund. Is this different enough to avoid a wash sale?

Thanks for your help!

 

[kaneohe]

This seems to be a bit controversial since each exchange by itself is not but the composite could be . Maybe you could find out from Vanguard what the relative ratios of the 3 are to make up TSM and change the ratios when you do the sales. There's a thread about TLH on bogleheads.org but I didn't see a real consensus on this issue.

edit: perhaps you could find at least one actively managed funds to exchange to and then migrate back after the wash period is over. Probably no significant effect from larger ERs for such a short period.

 

[2B]

I don't see where you'd have any problem. The rule is not very stringent and I've never heard of it being aggressively interpreted or enforced. You're selling a mutual fund and buying a different one. Each fund has a slightly different objective. You met the test.

 

[LOL!]

Not a wash sale at all.

 

[Gsquared]

Not an issue...

 

[kaneohe]

I don't see where you'd have any problem. The rule is not very stringent and I've never heard of it being aggressively interpreted or enforced. You're selling a mutual fund and buying a different one. Each fund has a slightly different objective. You met the test.

I personally hope that you folks are correct since it would simplify my life as well. I also have never heard of it being aggressively interpreted/enforced but my exposure to such info is limited. Just as an example though, suppose a fund co. has an S&P 500 Index fund and also offers S&P500 Growth and
S&P500 Value Funds as well. Isn't it possible that they just divide the index into 2 parts to create the Growth and Value components and so if I exchange from e.g. equal parts of Growth and Value into Index, some IRS agent who got up on the wrong side of the bed could decide to disallow the TLH?

 

[stephenandrew]

I personally hope that you folks are correct since it would simplify my life as well. I also have never heard of it being aggressively interpreted/enforced but my exposure to such info is limited. Just as an example though, suppose a fund co. has an S&P 500 Index fund and also offers S&P500 Growth and
S&P500 Value Funds as well. Isn't it possible that they just divide the index into 2 parts to create the Growth and Value components and so if I exchange from e.g. equal parts of Growth and Value into Index, some IRS agent who got up on the wrong side of the bed could decide to disallow the TLH?

I often wondered if you could just move from Vanguard's S&P 500 Fund to Fidelity's and meet the ash rule requirements as they are "different funds". But if you want to be certain about not violating the tax rules, I think the previous idea about buying a managed growth and income fund for 30 days and then switching back to the S&P500 seems to be a good way to take your loss but stay fully invested without materially impacting your investment strategy.

 

[FIRE'd@51]

You might want to read this

 

[Gsquared]

To me, the easiest way to think about it is to ask yourself how you would make the argument that two funds are "substantially different". I'd have a hard time coming up with arguments why an S&P index fund from Vanguard is "substantially different" from an S&P index fund. I'd be very comfortable explaining that an S&P value (and/or growth) was "substantially different" from the total S&P index fund.

 

[2B]

I personally hope that you folks are correct since it would simplify my life as well. I also have never heard of it being aggressively interpreted/enforced but my exposure to such info is limited. Just as an example though, suppose a fund co. has an S&P 500 Index fund and also offers S&P500 Growth and
S&P500 Value Funds as well. Isn't it possible that they just divide the index into 2 parts to create the Growth and Value components and so if I exchange from e.g. equal parts of Growth and Value into Index, some IRS agent who got up on the wrong side of the bed could decide to disallow the TLH?

The only time I would see a problem is if you are selling Vanguard S&P 500 and buying Fidelity S&P 500. Their investment objectives are the same. If you sell the Vanguard S&P 500 and buy their Total Market Index you have a new fund with a different investment objective (total market of all traded stocks versus only 500). I can't see where this would be a problem.

To be "safe" you could go to a large cap managed fund for 30 days but they are no more different in their investment objectives than going to the total market index. In fact, I think that they are more like the S&P 500 Index because that's what they benchmark against.

Don't make this any harder than it is.

 

[Nords]

Don't make this any harder than it is.

5YTG, you could look at it this way:

The IRS has far more profitable ways to spend their time. It actually costs more money & resources to audit every Joe [-]Plumber[/-] Taxpayer than is recovered in tax revenue. The IRS is not going to waste valuable agent/research hours determining who's avoided paying a few thousand in taxes and who's abused the system by evading the same. If you've been audited for this before (or if you're Martha Stewart) then you may not care to do this again, but the vast majority of Americans don't have cause for concern.

Even if you're riding the razor's edge, it's an enforcement issue. It's like a police officer noting that you're driving 2 MPH over the speed limit. They're not going to make the effort to change your behavior, let alone punish you. But if you're tossing your empty beer cans & smoldering joints out the window while erratically changing lanes and sporting an expired registration/safety sticker, then there will certainly be a deep & thorough investigation of your [-]body cavities[/-] finances.

Tax-loss selling is legal and it passes the reasonability test. The IRS document-matching computers will check your return against 1099s for obvious wash-sale issues like not making the 30-day rule. Otherwise it's extremely unlikely that there'll be human involvement in reviewing your taxes.

But [-]the IRS' computers can also smell fear[/-] if you've been exceedingly aggressive in other areas of tax strategizing, or if it makes you uncomfortable, then you shouldn't do it.

 

[kaneohe]

. I'd be very comfortable explaining that an S&P value (and/or growth) was "substantially different" from the total S&P index fund.

I'd also be very comfortable w/ the OR but not so w/ the AND esp. if all 3 were index funds. Isn't the whole made up of the parts so that a combination of value and growth could be construed to be equivalent to the composite.

I guess my take on this is that it is in the gray area and if I can do something that is not too difficult to move it clearly into the white area, I would do it rather than risk having it disallowed 2 yrs later. Admittedly the risk of being audited is quite low for anything and then the probability of the particular auditor being difficult about this is probably no worse than 50-50 so I guess it depends on how "risky" and how much in control you want to be.

 

[clifp]

FWIW, I intend to sell two Vanguard ETF Large Cap and Small Cap and buy VTI. While there are obviously lots of overlap, the Vanguard Total Market has additional stocks and as such is not a substainiallt identical security.

I am with Nords in this situation, if the IRS wants to say this is a wash sell, go ahead. IMO this isn't even a grey area, more like off white.