Wash sale question

[Rosie]

I'm probably answering my own question but I'd appreciate it if more knowledgeable souls than me would chime in.

I have a stock which I've been thinking of selling that has gone down considerably over the past several months. I'd have a large capital loss to offset cap gains on my 2015 taxes.

If, soon after selling the stock, I purchased shares of a mutual fund holding that same stock (along w many other stocks), would that trigger a wash sale?

From all the reading I've done, I've concluded no, it would not be a wash sale.

Apparently, selling shares of a mutual fund for shares of a different mutual fund (especially if the new fund tracks a different index, or is actively managed vs passively indexed) would not be considered a "substantially identical" purchase and would not trigger a wash sale situation. Presumably those different mutual funds, while not having identical holdings, would have many stocks in common.

So, logically, selling shares of an individual security and, w/in 31 days, buying shares of a mutual fund containing that security, would not trigger a wash sale. That's how I see it, anyways.

But I haven't found anything yet that specifically addresses this, so I'd appreciate some reassurance. Thanks!

 

[gauss]

Have you seen the recent Kitces article on this?

He suggests that the IRS has never really explicitly addressed this.

Ultimately, there will no doubt be a large number of “grey” and murky situations, but I suspect that until the IRS provides better guidance (or Congress rewrites/updates the wash sale rules altogether!), in the near term the easiest “red flag” warning is simply to look at the correlation between the original investment being loss-harvested, and the replacement security; at correlations above 0.95, and especially at 0.99+, it’s difficult to argue that the securities are not ”substantially identical” to each other in performance.

Are you concerned as to whether your brokerage will 1099-B report a wash sale or are you more concerned about making your own determination on this?

Were you planning to buy enough shares of the mutual fund to completely replace the share of the stock sold (ie. a commitment of capital in excess of 20 times the original investment)?

 

[LOL!]

Rosie, not a wash sale at all.

 

[ziggy29]

If, soon after selling the stock, I purchased shares of a mutual fund holding that same stock (along w many other stocks), would that trigger a wash sale?

I've never seen a hard and fast rule on this. Selling a stock to buy a mutual fund might not trigger a wash sale, but that said, I wouldn't sell an index ETF and immediately buy a mutual fund on the same index in order to test the IRS. Other than that I doubt the "substantially identical" clause of the wash sale rule could be invoked by the IRS, but I am no tax lawyer.

Selling a stock to buy a managed fund would almost certainly not ever trigger a wash sale.

 

[soupcxan]

The mutual fund might hold what, 5% of the stock you're selling? So it's 95% different? I would harvest the tax losses and sleep just fine at night.

 

[Rosie]

Thanks folks! I agree, the IRS hasn't really addressed this.

Are you concerned as to whether your brokerage will 1099-B report a wash sale or are you more concerned about making your own determination on this?

Both, I suppose. Since the stock sale will be via Vanguard Brokerage Service and the mut fund purchase will also be thru Vanguard, I could just go ask my Flagship rep.

Were you planning to buy enough shares of the mutual fund to completely replace the share of the stock sold (ie. a commitment of capital in excess of 20 times the original investment)?

If I'm following you correctly, then no. I would just like to invest most of the proceeds from the sale in an index fund (probably VTSAX) soon, rather than parking it in a money market fund for over a month.

OK, I feel better now. Thankyee kindly.