TLH when you own index funds

[walkinwood]

What strategies are you using to do tax loss harvesting when you own widely diversified index funds like a Total Stock Market Index or a Total International Stock Market Index?


How do you steer clear of wash sale rules?

 

[Gumby]

Suppose you have VFIAX (Vanguard Admiral S&P 500 Index Fund). You sell it and buy FXIAX (Fidelity S&P 500 Index Fund). Kitces suggests this would be sufficient https://www.kitces.com/blog/the-was...ubstantially-identical-mutual-funds-and-etfs/

But see also https://www.marketwatch.com/story/understanding-the-wash-sale-rules-2015-03-02

To be safer, you could do it like this. You own VTSMX (Total stock market index). You sell it and buy a combination of VLCAX (large cap index) and VEXAX (extended market index)

 

[RunningBum]

Suppose you have VFIAX (Vanguard Admiral S&P 500 Index Fund). You sell it and buy FXIAX (Fidelity S&P 500 Index Fund). Kitces suggests this would be sufficient https://www.kitces.com/blog/the-was...ubstantially-identical-mutual-funds-and-etfs/

But see also https://www.marketwatch.com/story/understanding-the-wash-sale-rules-2015-03-02

To be safer, you could do it like this. You own VTSMX (Total stock market index). You sell it and buy a combination of VLCAX (large cap index) and VEXAX (extended market index)

I don't see where Kitces suggests at all that VFIAX and FXIAX are sufficiently different. In fact, he says:

And while arguably swapping from index funds like SPY to IVV are almost certainly a wash sale abuse (or at least, a transaction that should trigger the wash sale rules)

SPY is an S&P 500 index fund and IVV is an S&P 500 ETF, so they are quite similar to the VFIAX/FXIAX comparison.

Please quote where you think Kitces says otherwise. One thing he does say is that the IRS doesn't seem too diligent about calling out wash sales if you don't identify them.

 

[audreyh1]

I think if you sold total stock market and bought S&P500 index instead that would be sufficiently different. But that’s just my opinion.

I see that Kitces shows the shows how close they are - he is actually talking about how closely they track:

In fact, because the performance of large-cap stocks is so dominating in cap-weighted index funds, IVV actually has a 0.989 correlation to the Vanguard Total Stock Market fund (VTI) as well. Unless the fund is extremely constrained – e.g., by some non-traditional weighting approach, or perhaps narrowly confined to a particular industry or sector – a huge portion of “different” ETFs based on differently-constructed indexes or from different providers still end out with extremely similar performance tracking, especially over time periods as “short” as a 30-day wash sale period.

Does close tracking make them identical? He says wash sales rules were established before mutual funds became a popular vehicle.

I would definitely not switch to another index fund tracking the same benchmark. That seems substantially identical.

At least the criteria is not substantially similar.

 

[Gumby]

I don't see where Kitces suggests at all that VFIAX and FXIAX are sufficiently different. In fact, he says:

SPY is an S&P 500 index fund and IVV is an S&P 500 ETF, so they are quite similar to the VFIAX/FXIAX comparison.

Please quote where you think Kitces says otherwise. One thing he does say is that the IRS doesn't seem too diligent about calling out wash sales if you don't identify them.

This is the language I was referencing "However, at least with mutual funds, the funds could and often were managed in a substantively different manner. While large diversified mutual funds often have a big chunk of overlap, there are clearly at least some differences in the underlying stocks, as well as the manner by which the manager buys and sells those stocks over time. Given these differences, and what at least was usually just “limited” overlap, mutual funds have kept their “ordinarily not substantially identical” treatment." He then goes on to say that switching from one ETF to an identical ETF at a different provider probably won't pass muster.

Of course, absent specific guidance from the IRS, you are taking the chance that an audit will disallow it. But consider the case where you have a Fidelity account and a Vanguard account. Vanguard reports the sale, but Fidelity doesn't report the purchase.

 

[travelover]

In the last recession, I broke my total stock market fund into large cap and a small cap index funds. Realistically, you are never going to get called on it unless you buy the exact same fund or stock.

 

[RunningBum]

This is the language I was referencing "However, at least with mutual funds, the funds could and often were managed in a substantively different manner. While large diversified mutual funds often have a big chunk of overlap, there are clearly at least some differences in the underlying stocks, as well as the manner by which the manager buys and sells those stocks over time. Given these differences, and what at least was usually just “limited” overlap, mutual funds have kept their “ordinarily not substantially identical” treatment." He then goes on to say that switching from one ETF to an identical ETF at a different provider probably won't pass muster.

I took that to mean he was talking about managed mutual funds, not index funds. I don't know why he wasn't more clear though. But if you read what he is talking about with S&P 500 index ETFs, I can't see how the same wouldn't hold true for S&P 500 index mutual funds.

Of course, absent specific guidance from the IRS, you are taking the chance that an audit will disallow it. But consider the case where you have a Fidelity account and a Vanguard account. Vanguard reports the sale, but Fidelity doesn't report the purchase.

Sure, you're not likely to get caught, but that doesn't make it right. There are a lot of things you can put in tax returns that the IRS won't know you are cheating on unless they audit you, but tax fraud is never right. I'm surprised you seem to be suggesting it's acceptable.

 

[Gumby]

I took that to mean he was talking about managed mutual funds, not index funds. I don't know why he wasn't more clear though. But if you read what he is talking about with S&P 500 index ETFs, I can't see how the same wouldn't hold true for S&P 500 index mutual funds.
Sure, you're not likely to get caught, but that doesn't make it right. There are a lot of things you can put in tax returns that the IRS won't know you are cheating on unless they audit you, but tax fraud is never right. I'm surprised you seem to be suggesting it's acceptable.

I have always waited 31 days when I harvested losses in something that I wanted to stay invested in. That way, I never have to make the judgment call. But, as I have long said, it's your money. Do what you like with it.

 

[kaneohe]

Schwab has a total stock market, S&P 500, and Schwab 1000. Hoping those are different enough........would be nice to have 1 more...........30 days sounds like a long time these days.

 

[pb4uski]

What strategies are you using to do tax loss harvesting when you own widely diversified index funds like a Total Stock Market Index or a Total International Stock Market Index?


How do you steer clear of wash sale rules?

In the past, I have sold Vanguard Total International Stock and bought Vanguard All-World FTSE ex-US... similar but IMO different enough to satisfy wash sale rules.

I have also in the past substituted 75% S&P index and 25% extended market index for Total Stock, but that was more to side-step Vanguard's frequent trading rules rather than wash sale rules.

YMMV

 

[Animorph]

I have swapped FSPSX + FPADX for FSGGX. That's an international fund with no emerging markets plus an emerging markets index fund for a global ex-U.S. fund.

Also FXROX for FXAIX + FSMAX, which is total U.S. for S&P500 plus total U.S. ex-S&P500.

I did find a couple of funds that were the 500 largest U.S. companies (not exactly S&P 500) and its completion index, but that didn't sound different enough. Fidelity did have a mid-cap index that behaved a lot like the S&P 500 completion index. I wouldn't mind being in that for a while.

This market drop was a great opportunity to switch back into my preferred funds and drop some of my legacy funds without impacting taxes.

The one downside will be finding enough capital gains to fill the 0% LTCG tax bracket next year. This year is still a big Roth conversion.

 

[walkinwood]

To be safer, you could do it like this. You own VTSMX (Total stock market index). You sell it and buy a combination of VLCAX (large cap index) and VEXAX (extended market index)

Thanks all for your suggestions. I think I'll follow a similar strategy to the one Gumby suggests above.