Wash Sale Question

[ENT Doc]

Wash sale question for those in the know.  So my wife and I have a combined account at Vanguard and we have the total stock market fund and a S&P fund (among others) in a taxable account.  I have the TSM fund in my Roth as well.  Separately, in another bank, she has the TSM fund in her i401k (as do I).  I don't see how a wash sale would occur if I sell the S&P fund and buy the TSM fund, but what if it's reversed (say I didn't already have the S&P 500 fund and was intending on buying that with the proceeds of the TSM sale)?  Since it's in a combined taxable account, do I need to turn off the div reinvestments in ALL of our accounts - the Roth, i401ks, taxable - to prevent a wash sale?

[ITEngineer]

Are you selling at a loss? If you have a gain, it's moot (but you'll have to pay capital gain taxes) Given the stock market rise over the past 8 years (and even recently) from my perspective it would be hard for those ETF's to have losses (though possible).

If you do have a loss I would still sell and buy immediately. S&P500 !=  TSM

No you don't need to turn off the dividend reinvestment (though a small portion of your gains might be short term gains taxable at a higher rate) but this will basically be a rounding error.

Now for your Hypothetical situation - Going from TSM to S&P 500 - still not a wash sale (assuming you have losses). For IRS Tax purposes those funds would not be considered "Substantially Identical". Going from Vanguards S&P 500 to Fidelity's S&P 500 might be but once again, I would just wait 31 days if it was in question AND I had a loss.

Hope that helps. Let me know if I misunderstood something.

[ENT Doc]

ITEngineer wrote:

Are you selling at a loss? If you have a gain, it’s moot (but you’ll have to pay capital gain taxes) Given the stock market rise over the past 8 years (and even recently) from my perspective it would be hard for those ETF’s to have losses (though possible).

If you do have a loss I would still sell and buy immediately. S&P500 !=  TSM

No you don’t need to turn off the dividend reinvestment (though a small portion of your gains might be short term gains taxable at a higher rate) but this will basically be a rounding error.

Now for your Hypothetical situation – Going from TSM to S&P 500 – still not a wash sale (assuming you have losses). For IRS Tax purposes those funds would not be considered “Substantially Identical”. Going from Vanguards S&P 500 to Fidelity’s S&P 500 might be but once again, I would just wait 31 days if it was in question AND I had a loss.

Hope that helps. Let me know if I misunderstood something.

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I don't know if I agree with this.  If I don't turn off dividend reinvestment on the TSM I'll be buying a substantially identical stock within 30 days of the original sale (assuming the dividend is released and reinvested in that time period).  It's not the purchasing of the S&P I'm worried about - it's the reinvestment in TSM in all the accounts mentioned.  Sorry for not clarifying - yes, this is for TLHing.

[PhysicianOnFIRE]

You are correct in your line of thinking. You don't need to worry about the fund you exchange into when you TLH. It's the fund you sell (S&P 500).

The situation you want to avoid is the purchase of "replacement shares" of the substantially identical fund in any of your accounts within 30 days of a tax loss harvesting sale in the taxable account. Going from TSM to S&P 500 is a non-issue if you don't own S&P 500 elsewhere. The reverse (TLH from S&P 500 to TSM) could be problematic.

To keep a wash sale from happening accidentally if selling TSM for a loss, turn off all automatic dividend reinvestments and automated investments in TSM in all accounts. Reinvest your dividends manually. For example, if you're contributing to TSM in your 401(k)s via paycheck every 2 weeks, that's a problem.

 

 

 

[ITEngineer]

ENT Doc wrote:

I don’t know if I agree with this.  If I don’t turn off dividend reinvestment on the TSM I’ll be buying a substantially identical stock within 30 days of the original sale (assuming the dividend is released and reinvested in that time period).  It’s not the purchasing of the S&P I’m worried about – it’s the reinvestment in TSM in all the accounts mentioned.  Sorry for not clarifying – yes, this is for TLHing.

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Won't the sale of the stock terminate the dividend reinvestment automatically? I'm assuming you are selling 100% of that position. It does for me.

If it doesn't, assuming a 2% annual dividend, you'd only be repurchasing ~0.5% of the original amount. The amount you might have to exclude from TLH would be a rounding error.

[PhysicianOnFIRE]

ITEngineer wrote:

I’m assuming you are selling 100% of that position.

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You only want to sell the lots that have capital losses, i.e. today's price is below your cost basis. Unless he very recently lump summed a windfall into TSM, I would expect the majority of his lots to have a gain. This is why it's important to use "Specific ID" (Vanguard) or equivalent for your cost basis for determining which lots to sell to TLH.

 

[ITEngineer]

There are a lot of assumptions here (and I might not be picking up on all of them) so please forgive me. We already agreed he has no wash sale concerns going from S&P500 -> TSM and we are now in hypothetical territory (right?)

I'm assuming he isn't TLH so he can deduct $3000 off his income. He's trying to offset a specific gain (which leads me to believe there would be other taxable assets in play). Yes if you have a large position and just want to sell enough to offset a gain you would still have dividend reinvestment to worry about.

That said I would probably stop dividend re-investment and pool those resources annually for re-balancing or for buying new positions at a time of my choosing. This is really a better scenario for when you are investing in individual stocks, not TSM funds. If you have a portfolio of 50 stocks you manage and you're selling a gain with a loser to offset the tax hit, but want to replace the losing shares, I would just wait 31 days to replace the position.

Not automatically re-investing taxable dividends saves at least one headache. It makes calculating the cost basis easier as the owner would have specific purchase points for any given security, not ones generated quarterly.

I think I've gone off topic now...

[ENT Doc]

PhysicianOnFIRE wrote:

You are correct in your line of thinking. You don’t need to worry about the fund you exchange into when you TLH. It’s the fund you sell (S&P 500).

The situation you want to avoid is the purchase of “replacement shares” of the substantially identical fund in any of your accounts within 30 days of a tax loss harvesting sale in the taxable account. Going from TSM to S&P 500 is a non-issue if you don’t own S&P 500 elsewhere. The reverse (TLH from S&P 500 to TSM) could be problematic.

To keep a wash sale from happening accidentally if selling TSM for a loss, turn off all automatic dividend reinvestments and automated investments in TSM in all accounts. Reinvest your dividends manually. For example, if you’re contributing to TSM in your 401(k)s via paycheck every 2 weeks, that’s a problem.

 

 

 

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Ok, so I should have all account div reinvestments turned off (including my wife and my separate accounts).  Would I be correct in saying that I could sell a lot of TSM at a loss right after the div distribution date and purchase the S&P fund and not have to worry about turning off the div reinvestments for TSM?

[PhysicianOnFIRE]

ENT Doc wrote:

Would I be correct in saying that I could sell a lot of TSM at a loss right after the div distribution date and purchase the S&P fund and not have to worry about turning off the div reinvestments for TSM?

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The key is not buying replacement shares of TSM within 30 days either before or after you sell TSM at a loss. The dividend distribution date is a non-issue as long as you don't use the money from the dividend to buy more shares within a month of taking a loss.

Side note: It is OK to sell recently purchased shares (within 30 days) for a loss, since the recently purchased shares are not replacing other shares in which you took a loss.