taxable account and reinvestment vs. distribute

[mrfeh]

So the Wash Sale Rule applies to not just the stock of an individual company but mutual funds and ETFs also? I would not have thought reinvesting dividends would be considered a violation, I thought it would have applied to me purchasing new shares of say the mutual fund. Now I realize reinvesting dividends back into the fund is purchasing the same thing, it is just that I didn't think it would apply to reinvesting the dividends. And yes, it is a 61 day time period, 30 before, 30 after and the day of, I always thought it was 30 days after the sale.

I thought selling shares of the tax exempt bond fund was a good way to offset any capital gains from the Total Stock and Total International Stock Market mutual funds since the vast majority of the tax exempt fund's shares were purchased at a higher nav than today's. This whole thing is not good news!

Yeah, sorry to be the messenger of bad news.

I don't know how closely the IRS watches stuff like this. I don't know what potential penalties are, or if there are ways to fix it.

Maybe somebody else can chime in on that aspect.

 

[donheff]

Vanguard blocks trades that violate the wash sale rule. Does anyone know how they deal with reinvested dividends? Do they just let it go through and leave it to IRS and the account holder?

 

[Exchme]

Vanguard blocks trades that violate the wash sale rule. Does anyone know how they deal with reinvested dividends? Do they just let it go through and leave it to IRS and the account holder?

They block trades in Mutual Funds in the same account that violate their frequent trading rules, which includes re-buying what you just sold for 30 days.

I have done a wash sale at Vanguard when I sold the Total Bond fund in taxable that had a small loss in it and bought the same fund in my IRA. It simply showed up on the 1099 as a wash sale, so I didn't get a tax write-off for it. I could have selected a slightly different bond fund (say Intermediate instead of Total Bond) and avoided the wash sale, but the amount in question was very small and my main goal was to get bonds into the IRA, not the small loss of a deduction.

 

[Graybeard]

I haven't gotten back here since I posted a couple of days ago.

That night and the next day I did some reading at Investotopia and the BH Wiki about the Wash Sale Rule. I was surprised at how involved it is! The BH Wiki had different links and went into a lot of detail.

From what I read, when reinvesting my cap gains and dividends in my rollover IRA and Roth IRA effects the taxable account re the Wash Sale Rule! So reinvesting in those 2 accounts with the same funds in the taxable account negates being able to use cap losses (from the tax free bond fund) to offset cap gains in the taxable account equity funds! That sounds insane but I am pretty sure I read that correctly. There were exceptions based upon how dividends are paid whether they are compounded daily but paid monthly or quarterly and if it is a tax free fund!

I gave up, this is way too complex and way too detailed for me to attempt to do any tax loss harvesting. I never had much activity in my a taxable account but with RMDs after the taxes it probably will all be reinvested into the Total Stock and Total International funds.

As far as the tax exempt bond fund I have, if I don't reinvest the dividends it pays monthly I'll just be putting them into one of the 2 equity funds creating a new cost basis each month. This just seems like a pain in the butt to be aware of how not to run afoul of the IRS so I guess I'll just do what I have always done and if I need to sell anything in the taxable account I'll just deal with it taxwise. I'm disappointed but I'm not a CPA and always found taxes very confusing.

 

[COcheesehead]

I haven't gotten back here since I posted a couple of days ago.

That night and the next day I did some reading at Investotopia and the BH Wiki about the Wash Sale Rule. I was surprised at how involved it is! The BH Wiki had different links and went into a lot of detail.

From what I read, when reinvesting my cap gains and dividends in my rollover IRA and Roth IRA effects the taxable account re the Wash Sale Rule! So reinvesting in those 2 accounts with the same funds in the taxable account negates being able to use cap losses (from the tax free bond fund) to offset cap gains in the taxable account equity funds! That sounds insane but I am pretty sure I read that correctly. There were exceptions based upon how dividends are paid whether they are compounded daily but paid monthly or quarterly and if it is a tax free fund!

I gave up, this is way too complex and way too detailed for me to attempt to do any tax loss harvesting. I never had much activity in my a taxable account but with RMDs after the taxes it probably will all be reinvested into the Total Stock and Total International funds.

As far as the tax exempt bond fund I have, if I don't reinvest the dividends it pays monthly I'll just be putting them into one of the 2 equity funds creating a new cost basis each month. This just seems like a pain in the butt to be aware of how not to run afoul of the IRS so I guess I'll just do what I have always done and if I need to sell anything in the taxable account I'll just deal with it taxwise. I'm disappointed but I'm not a CPA and always found taxes very confusing.

It’s really pretty simple just don’t sell at a loss and then buy the same 30 days either side of the sale - across all equally registered accounts.

 

[Graybeard]

It’s really pretty simple just don’t sell at a loss and then buy the same 30 days either side of the sale - across all equally registered accounts.

Well the problem is virtually all the purchases of the Intermediate Term Tax Exempt fund were at higher navs so pretty much all lots are a capital loss. It may not really be an issue, I don't need to sell shares to raise money it just seemed like a good way to offset cap gains.

 

[COcheesehead]

Well the problem is virtually all the purchases of the Intermediate Term Tax Exempt fund were at higher navs so pretty much all lots are a capital loss. It may not really be an issue, I don't need to sell shares to raise money it just seemed like a good way to offset cap gains.

You can still tax loss harvest/sell shares, just don’t reinvest the interest from the fund for a short time, then turn around and reinvest the proceeds in something similar, though not equal or spend the money. Just always give yourself a 30 day window (60 days total) either side of selling for a loss.

 

[SecondCor521]

Yeah, sorry to be the messenger of bad news.

I don't know how closely the IRS watches stuff like this. I don't know what potential penalties are, or if there are ways to fix it.

Maybe somebody else can chime in on that aspect.

I think it's hard for the IRS to detect wash sales, especially if they happen across accounts and/or brokerages.

Most brokerage firms will automatically flag and calculate wash sales in taxable accounts if the sell and buy both happened in the same account.

After one has created a wash sale, there is nothing that can be done to fix it.

The only "penalty" for a wash sale is that the capital loss is disallowed. But the capital loss that could have been taken gets added to the basis of the replacement shares, so it really just means that the capital loss gets deferred until later, when you sell the shares that you bought that caused a wash sale in the first place. In theory, that is, if everything is tracked properly.

If you create a wash sale in a taxable account at a single brokerage, it will usually show a wash sale disallowed amount, which you put on your Form 8949 as an adjustment with code W. If you create it across multiple accounts, you'd do the same thing; it's just that you would be responsible for manually figuring out the disallowed amount and tracking the additional basis on the replacement shares.

 

[Graybeard]

You can still tax loss harvest/sell shares, just don’t reinvest the interest from the fund for a short time, then turn around and reinvest the proceeds in something similar, though not equal or spend the money. Just always give yourself a 30 day window (60 days total) either side of selling for a loss.

Thanks, yes I could but I have just 3 funds in my taxable account and I just want to keep it simple so adding another fund isn't something I want to do. It is something I want to look into though, something that isn't going to create dividends and cap gains but I'm not sure that exists. If it does, then I need to stop reinvesting the dividends.