Accidental IRA wash sale

[USGrant1962]

I realized I accidentally did a small wash sale between taxable (sale) and IRA (purchase). I sold some ultra-short bonds (VUSFX) in taxable to finance iBond purchases, and totally unrelated* but within 30 days, exchanged my intermediate bonds for VUSFX in an IRA. The loss was only a few hundred dollars, so not really material. But I have two questions:

1. When I import the 1099 from Vanguard Brokerage into tax software it will include proceeds, basis, and calculated loss. How do I designate a wash sale and disallow the loss without making my return mismatch the 1099? Is there usually a checkbox or something in tax software?

2. How does the IRS track the IRA wash sale rule? AFAIK there is no reporting of individual sales/purchases within an IRA.

*well, it is all related to 7% inflation vs ~2% nominal bonds.

 

[Montecfo]

I realized I accidentally did a small wash sale between taxable (sale) and IRA (purchase). I sold some ultra-short bonds (VUSFX) in taxable to finance iBond purchases, and totally unrelated* but within 30 days, exchanged my intermediate bonds for VUSFX in an IRA. The loss was only a few hundred dollars, so not really material. But I have two questions:

1. When I import the 1099 from Vanguard Brokerage into tax software it will include proceeds, basis, and calculated loss. How do I designate a wash sale and disallow the loss without making my return mismatch the 1099? Is there usually a checkbox or something in tax software?

2. How does the IRS track the IRA wash sale rule? AFAIK there is no reporting of individual sales/purchases within an IRA.

*well, it is all related to 7% inflation vs ~2% nominal bonds.

As far as I know this is not tracked. Not sure if broker is required to flag this. And I even think the authority that would make this a wash sale is only a private latter ruling, not statute.

Which is a long way of saying, not sure I would worry about it.

 

[youbet]

Schwab tracks this automatically. Vanguard must too.

Go to the "Realized Gain/Loss" tab for the account where you sold the VUSFX and observe what Vanguard is showing. Is it the loss you actually incurred or an adjusted amount which takes the wash sale rule into account?

 

[PaunchyPirate]

Vanguard's 1099-B detail pages have a column for "Wash sale loss disallowed (Box 1g)" that would have a value in it IF their software catches the situation. I had this on my 2017 1099-B. I don't recall the situation that caused my wash sale of $16.34. I don't know what circumstances Vanguard catches the situation or not, unfortunately.

I can't recall if TurboTax imported this data automatically. But I know there is a place to manually enter it on one of the screens that appears after the basic transaction data is entered.

 

[Exit 2024]

If 2 accounts are with different brokerages - I do not think it will be tracked.
But for me Fidelity actually marked one sale in taxable as wash due to regular purchases in 401k of the same bond fund, good that it was very small amount.

 

[SecondCor521]

I realized I accidentally did a small wash sale between taxable (sale) and IRA (purchase). I sold some ultra-short bonds (VUSFX) in taxable to finance iBond purchases, and totally unrelated* but within 30 days, exchanged my intermediate bonds for VUSFX in an IRA. The loss was only a few hundred dollars, so not really material. But I have two questions:

1. When I import the 1099 from Vanguard Brokerage into tax software it will include proceeds, basis, and calculated loss. How do I designate a wash sale and disallow the loss without making my return mismatch the 1099? Is there usually a checkbox or something in tax software?

2. How does the IRS track the IRA wash sale rule? AFAIK there is no reporting of individual sales/purchases within an IRA.

*well, it is all related to 7% inflation vs ~2% nominal bonds.

1. If Vanguard flags it, they'll note it on the 1099-B as a wash sale and have the disallowed amount with an adjustment code W.

If Vanguard doesn't flag it and you want to report the wash sale, then you would enter the disallowed amount and adjustment code W into your tax software such that it ended up on the Form 8949. It'll show up in columns F and G.

There won't be a mismatch - the IRS will assume that you know something your brokerage does not and are correcting it.

2. Since the replacement shares are in the IRA and there is no basis tracking in the IRA, you essentially have lost the tax benefit of the disallowed wash sale amount forever. It also doesn't affect anything with respect to the way your IRA will be taxed in the future. There is therefore no reason for either you or the IRS to keep track of this fact.

 

[USGrant1962]

Thanks to all for the feedback. Sounds like Vanguard will process it correctly an I won't have to do anything weird at tax time. That was my concern. As I said, it is only a couple hundred dollars loss so nothing material, just the first time I've run into the wash sale rule and its illogical IRA extension.

I can't yet look at the Vanguard realized losses report because I just did the second transaction today (the sale). I posted this like an hour later when I saw the words "wash sale" somewhere (idk if it was here or Bogleheads) and said to myself "hmmm?" Doesn't matter, I would have done the transactions even if I thought about it in advance.

 

[Montecfo]

I think when you do this the deferred loss disappears. A rare case of disappearing basis.

 

[RunningBum]

I've never done it but I think when you enter a sale on TT it asks you, among other questions, if this is a wash sale. You can check and override the 1099-B if VG did not report it as such. I'd try it with a made up transaction to verify but I don't feel like firing up TT again when you can do so just as easily with whatever tax program you use.

I wouldn't just ignore it as one poster suggested you might do.

 

[Montecfo]

I've never done it but I think when you enter a sale on TT it asks you, among other questions, if this is a wash sale. You can check and override the 1099-B if VG did not report it as such. I'd try it with a made up transaction to verify but I don't feel like firing up TT again when you can do so just as easily with whatever tax program you use.

I wouldn't just ignore it as one poster suggested you might do.

I made that suggestion due to small amount involved, per the poster, its accidental nature, and that it was not reported on 1099 as the poster indicated.

Not sure what upside there is for a taxpayer to voluntarily report a wash sale triggered accidently by an IRA transaction, given that the loss is not deferred but in fact gone forever. (Rev. Rul. 2008-5).

Further, by not trying the 1099, you invite more scrutiny.

I probably would not do it for those reasons.

 

[RunningBum]

Not sure what upside there is for a taxpayer to voluntarily report a wash sale triggered accidently by an IRA transaction, given that the loss is not deferred but in fact gone forever. (Rev. Rul. 2008-5).

The upside is not being fined or imprisoned for tax fraud.

 

[Montecfo]

The upside is not being fined or imprisoned for tax fraud.

People do not go to prison for failing to tag something as arcane as a possible wash sale in an IRA. It does not constitute tax fraud and no one has ever gone to prison for failure to pay a small amount of potential tax liability (and potentially even a small penalty) such as that laid out in this thread. Even the risk of that happening would appear to be remote.

IRS would simply send you a notice, not stormtroopers to arrest and imprison you!

If you really think that I'm glad to be able to put your mind at ease.

 

[ivinsfan]

The upside is not being fined or imprisoned for tax fraud.

That might be what they want to think but I have a friend that hasn't filed a federal return in at least 5 years, and they haven't even coming knocking on his door..


Even as far as a punitive type fine in these minor cases there might be a penalty but that's not the same as a fine.

 

[RunningBum]

I understand I overstated it. But to rationalize misreporting on your tax return because there's no upside to doing it correctly opens the door for a whole lot of wrongdoing.

 

[Montecfo]

I understand I overstated it. But to rationalize misreporting on your tax return because there's no upside to doing it correctly opens the door for a whole lot of wrongdoing.

Some things truly matter, some do not, and I think you are sticking with hyperbole here.

While I take great pride in doing things right, my years as a CPA in public practice suggest most people can make these small judgments while also failing to descend into a life of crime. But my perspective there is, I admit, mine alone there is ample data to support it.

 

[PaunchyPirate]

Since I think the OP's original questions have been answered, I'll add my own situation to this thread rather than opening another. Aside from the prior discussions of whether the IRS would catch it or not, do I have a correct understanding of my wash sale:

I've been doing some tax loss harvesting of my bond fund(s) in my taxable account. I hold some bonds in my taxable account, because my entire IRA is already filled with bonds and I need to do this to maintain my asset allocation.

1. On 3/11/22 I sold all of my VBTLX (Vanguard Total Bond) fund at a loss of $6800.

2. I purchased a substantially different bond fund that same day in the amount of my sale.

3. Unfortunately, I forgot that I also had dividend re-investment ON for VBTLX in my IRA. So, on 2/28/22 (less than 30 days prior to my taxable account transaction), $1250 of VBTLX was purchased by the auto-reinvestment. I have since turned off that re-investment until I decide to stop tax loss harvesting.

Do I have it correct that my $6800 loss will be reduced by $1250 to $5550? Since the purchase that triggered the wash sale was in the IRA, I'm pretty sure that $1250 loss is lost forever.

I'll be doing more TLH and then will eventually sell an unwanted mutual fund for a profit. So I want to make sure I know the exact amounts of my deductible losses so that I can know how much of my gain transaction will be offset.

Am I understanding it correctly?

 

[RunningBum]

PP, yes, your prior purchase of VBTLX in your IRA makes that part of your taxable sale loss a wash, and lost forever.

Turning off automatic reinvestments will help you prevent future wash sales. It would be best to have different holdings in your taxable account than what you have in your IRAs. Then you don't have to worry about wash sales between accounts.

 

[PaunchyPirate]

PP, yes, your prior purchase of VBTLX in your IRA makes that part of your taxable sale loss a wash, and lost forever.

Turning off automatic reinvestments will help you prevent future wash sales. It would be best to have different holdings in your taxable account than what you have in your IRAs. Then you don't have to worry about wash sales between accounts.

Agreed. Thanks RunningBum. I knew the triggering rules. And temporarily forgot about them, obviously. I just wasn't sure of the amount of the lost that would be disallowed.

While the bonds losing money isn't fun, at least I can leverage the situation and cleanly dispose of my unwanted, high cost stock find without having to pay capital gains taxes on it. I'll re-invest those proceeds in VTSAX immediately after that sale.

To tie this into earlier comments on this thread, as of today, there is nothing that indicates a disallowed wash sale amount on Vanguard's Cost Basis page for these transaction. The loss amounts have not been adjusted at all. So I'm using a small spreadsheet to document the wash sale details and will see how it compares to the 1099 next tax season.

 

[Graybeard]

Are you guys sure that reinvesting the dividends in that bond fund in your IRA or Roth account runs afoul of the wash sale rule when selling the same bond fund in your taxable account? I ask this because I asked the CPA that did my taxes a month ago. She ran a simulation with her tax software where I sold fund X in the taxable account at a loss when in my IRA the same fund I was reinvesting the dividends and the software showed the loss in the taxable account was accepted for tax loss harvesting. This is very confusing when owning the same funds in a taxable, IRA and Roth and reinvesting dividends and cap gains in the IRA and or the Roth but not in the taxable account.

 

[RunningBum]

Are you guys sure that reinvesting the dividends in that bond fund in your IRA or Roth account runs afoul of the wash sale rule when selling the same bond fund in your taxable account? I ask this because I asked the CPA that did my taxes a month ago. She ran a simulation with her tax software where I sold fund X in the taxable account at a loss when in my IRA the same fund I was reinvesting the dividends and the software showed the loss in the taxable account was accepted for tax loss harvesting. This is very confusing when owning the same funds in a taxable, IRA and Roth and reinvesting dividends and cap gains in the IRA and or the Roth but not in the taxable account.

From Schwab https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales
Q: What would happen if I sold a security at a loss in a taxable account and then immediately repurchased it in a retirement account, such as an IRA?
The IRS has ruled (Rev. Rul. 2008-5) that when an individual sells a security at a loss and then repurchases that security in their (or their spouses’) IRA within 30 days before or after the sale, that loss will be subject to the wash-sale rules.

You can click on the link for the full ruling at the IRS site.

 

[Montecfo]

Dividend reinvestment could be a smaller issue since presumably fewer shares are being purchased, possibly.dooming only a fraction of the loss.

But it does appear to apply absent some carveout.

In the OPs case I am not sure there is in fact a wash sale (and we don't know the facts in detail) since the 1099 did not flag it as a wash sale.

 

[RunningBum]

In the OPs case I am not sure there is in fact a wash sale (and we don't know the facts in detail) since the 1099 did not flag it as a wash sale.

In post 7 the OP said the transaction just happened earlier that day. No 1099 has been issued yet since it is a 2022 transaction. In post 1 the OP said "When I get a 1099..." [for 2022]. The first post also gives sufficient detail that it is a wash.

I'm not trying to start another argument, just stating what the OP has posted.

 

[USGrant1962]

In post 7 the OP said the transaction just happened earlier that day. No 1099 has been issued yet since it is a 2022 transaction. In post 1 the OP said "When I get a 1099..." [for 2022]. The first post also gives sufficient detail that it is a wash.

I'm not trying to start another argument, just stating what the OP has posted.

That's all correct. I checked and the IRA transaction completed Friday with no indication of a wash sale adjustment in the taxable account (yet).

Looking at the taxable side I did have a normal, all taxable wash sale at the end of last year for a whole $16, duly noted on the realized cost basis screen. That's a downside of using ultra-short bond fund as a money market replacement I guess. I'll have to watch that a little closer in the future and make sure my cash flow stays in the money market longer.

 

[Montecfo]

In post 7 the OP said the transaction just happened earlier that day. No 1099 has been issued yet since it is a 2022 transaction. In post 1 the OP said "When I get a 1099..." [for 2022]. The first post also gives sufficient detail that it is a wash.

I'm not trying to start another argument, just stating what the OP has posted.

Thanks for pointing that out RB! That does explain some things that I missed.

And previously I thought we were just airing differing viewpoints, which is unusual since I often find yours to be spot-on.

 

[Ncc1701]

Schwab tracks this automatically. Vanguard must too.

Go to the "Realized Gain/Loss" tab for the account where you sold the VUSFX and observe what Vanguard is showing. Is it the loss you actually incurred or an adjusted amount which takes the wash sale rule into account?

Not true for Schwab. Schwab will only report a wash when the trades occur in the same CUSIP and in the same account.

While brokers may not report the wash, that of course does not relieve the taxpayer of the obligation to do so...