TLH while holding TSP C Fund

[ENT Doc]

If I am planning to TLH by selling a S&P 500 index fund and buying a Total Stock Market index fund (both at Vanguard) will I have problems because I own the TSP C fund?  The S&P 500 fund and C fund are essentially the same, but I don't believe the C fund has any dividend distributions and repurchases of the underlying fund set up.  I think Blackrock is constantly getting dividends and buying more of each underlying stock, but I don't think the NAV ever drops like the Vanguard fund does following a quarterly distribution.  Will I be ok from a wash sale perspective?  I should also note that this assumes all of my TSP purchases are early in the year and the TLH occurs later.

[The White Coat Investor]

Different investments, so I wouldn't expect any problem at all. Not to mention the IRS has no idea what you own in the TSP.

[TheAbacus]

If you don't mind sharing, what date did you buy the S&P 500 fund lot? I'm surprised anyone has had a chance to TLH it this year.

[childay]

The White Coat Investor wrote:

Different investments, so I wouldn’t expect any problem at all. Not to mention the IRS has no idea what you own in the TSP.

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Doesn't the C Fund also track the S&P 500 index?

ENT I guess you are saying since C Fund doesn't have dividends you won't run into the 30 day rule?

[ENT Doc]

Yes, the C fund definitely tracks the S&P 500.  I'm planning on putting more into the S&P 500 fund soon so that I might be able to TLH - not based on an old investment.  WCI, I'm not sure what you're saying about different investments or what the IRS does or doesn't know.  The rules are what they are regarding wash sale, no?  Since the C fund and S&P are identical, you run the risk of a wash sale if you sell the S&P, buy VTSAX, and then your next month's TSP allocation buys the C fund.  However, in the situation where one has funded the TSP early in the year, one would only have to worry about dividend reinvestment to avoid a wash sale.  So this is the nature of my question - is the C fund not regarded as a fund that has dividend distributions (from the perspective of wash sale avoidance) if Blackrock is continuously taking the dividends and reinvesting them rather than giving a lump distribution which then gets reinvested in the entire underlying fund at once?

[The White Coat Investor]

ENT Doc wrote:

Yes, the C fund definitely tracks the S&P 500.  I’m planning on putting more into the S&P 500 fund soon so that I might be able to TLH – not based on an old investment.  WCI, I’m not sure what you’re saying about different investments or what the IRS does or doesn’t know.  The rules are what they are regarding wash sale, no?  Since the C fund and S&P are identical, you run the risk of a wash sale if you sell the S&P, buy VTSAX, and then your next month’s TSP allocation buys the C fund.  However, in the situation where one has funded the TSP early in the year, one would only have to worry about dividend reinvestment to avoid a wash sale.  So this is the nature of my question – is the C fund not regarded as a fund that has dividend distributions (from the perspective of wash sale avoidance) if Blackrock is continuously taking the dividends and reinvesting them rather than giving a lump distribution which then gets reinvested in the entire underlying fund at once?

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The Vanguard 500 Index Fund and the C Fund are not, in the words of the IRS, "substantially identical" in my opinion. I would argue with an IRS auditor that there are a number of differences:

• C fund doesn't pay dividends.


• C fund is only available to federal employees


• C fund is only available inside the TSP


• They own different stocks in different proportions.


• They're run by entirely different companies.


• They have different management teams.

Now, are they highly correlated? Sure. But that's not what the IRS is looking at.

If you're really worried about it, then use a TSM fund in your taxable account. Not sure why anyone would choose a 500 fund over a TSM fund given the choice anyway.

But at any rate, the IRS isn't looking at this crap as closely as you're worried they are. This is super small potatoes stuff for them. I've never even heard of someone who's heard of someone who's had their tax loss harvesting audited, especially over an issue like this. The IRS has no idea that you own the C fund for instance. The TSP doesn't tell them and you don't either. Same with any other retirement account, HSA, or 529. The only account where you actually tell the IRS what you own is your taxable account.

[ENT Doc]

The White Coat Investor wrote:

ENT Doc wrote:

Yes, the C fund definitely tracks the S&P 500.  I’m planning on putting more into the S&P 500 fund soon so that I might be able to TLH – not based on an old investment.  WCI, I’m not sure what you’re saying about different investments or what the IRS does or doesn’t know.  The rules are what they are regarding wash sale, no?  Since the C fund and S&P are identical, you run the risk of a wash sale if you sell the S&P, buy VTSAX, and then your next month’s TSP allocation buys the C fund.  However, in the situation where one has funded the TSP early in the year, one would only have to worry about dividend reinvestment to avoid a wash sale.  So this is the nature of my question – is the C fund not regarded as a fund that has dividend distributions (from the perspective of wash sale avoidance) if Blackrock is continuously taking the dividends and reinvesting them rather than giving a lump distribution which then gets reinvested in the entire underlying fund at once?

Click to expand…

The Vanguard 500 Index Fund and the C Fund are not, in the words of the IRS, “substantially identical” in my opinion. I would argue with an IRS auditor that there are a number of differences:

• C fund doesn’t pay dividends.


• C fund is only available to federal employees


• C fund is only available inside the TSP


• They own different stocks in different proportions.


• They’re run by entirely different companies.


• They have different management teams.

Now, are they highly correlated? Sure. But that’s not what the IRS is looking at.

If you’re really worried about it, then use a TSM fund in your taxable account. Not sure why anyone would choose a 500 fund over a TSM fund given the choice anyway.

But at any rate, the IRS isn’t looking at this crap as closely as you’re worried they are. This is super small potatoes stuff for them. I’ve never even heard of someone who’s heard of someone who’s had their tax loss harvesting audited, especially over an issue like this. The IRS has no idea that you own the C fund for instance. The TSP doesn’t tell them and you don’t either. Same with any other retirement account, HSA, or 529. The only account where you actually tell the IRS what you own is your taxable account.

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You could argue that but I think you would lose on the following grounds:

1. The fund does pay dividends, but not in the same way a Vanguard fund might.  This still doesn't change the fact that the underlying securities or fund of securities in this case is identical.

2/3. Availability isn't part of the wash sale rule, unless you know of something I don't in section 1091 of the tax code.

4.  They don't own substantially different stocks in different proportions.  From the C fund website:

"The objective of the C Fund is to match the performance of the Standard & Poor’s 500 Stock Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies."

Also:

"The C Fund holds all the stocks included in the S&P 500 Index in virtually the same weights that they have in the index."

5/6. Who runs an index fund has no bearing on whether the underlying funds are substantially identical.

 

While the likelihood of an audit is low here, this is about following the law.  I can't imagine you'd suggest that someone should cheat on their federal return because the risk of an audit is ridiculously low.

[The White Coat Investor]

ENT Doc wrote:

The White Coat Investor wrote:

ENT Doc wrote:

Yes, the C fund definitely tracks the S&P 500.  I’m planning on putting more into the S&P 500 fund soon so that I might be able to TLH – not based on an old investment.  WCI, I’m not sure what you’re saying about different investments or what the IRS does or doesn’t know.  The rules are what they are regarding wash sale, no?  Since the C fund and S&P are identical, you run the risk of a wash sale if you sell the S&P, buy VTSAX, and then your next month’s TSP allocation buys the C fund.  However, in the situation where one has funded the TSP early in the year, one would only have to worry about dividend reinvestment to avoid a wash sale.  So this is the nature of my question – is the C fund not regarded as a fund that has dividend distributions (from the perspective of wash sale avoidance) if Blackrock is continuously taking the dividends and reinvesting them rather than giving a lump distribution which then gets reinvested in the entire underlying fund at once?

Click to expand…

The Vanguard 500 Index Fund and the C Fund are not, in the words of the IRS, “substantially identical” in my opinion. I would argue with an IRS auditor that there are a number of differences:

• C fund doesn’t pay dividends.


• C fund is only available to federal employees


• C fund is only available inside the TSP


• They own different stocks in different proportions.


• They’re run by entirely different companies.


• They have different management teams.

Now, are they highly correlated? Sure. But that’s not what the IRS is looking at.

If you’re really worried about it, then use a TSM fund in your taxable account. Not sure why anyone would choose a 500 fund over a TSM fund given the choice anyway.

But at any rate, the IRS isn’t looking at this crap as closely as you’re worried they are. This is super small potatoes stuff for them. I’ve never even heard of someone who’s heard of someone who’s had their tax loss harvesting audited, especially over an issue like this. The IRS has no idea that you own the C fund for instance. The TSP doesn’t tell them and you don’t either. Same with any other retirement account, HSA, or 529. The only account where you actually tell the IRS what you own is your taxable account.

Click to expand…

You could argue that but I think you would lose on the following grounds:

1. The fund does pay dividends, but not in the same way a Vanguard fund might.  This still doesn’t change the fact that the underlying securities or fund of securities in this case is identical.

2/3. Availability isn’t part of the wash sale rule, unless you know of something I don’t in section 1091 of the tax code.

4.  They don’t own substantially different stocks in different proportions.  From the C fund website:

“The objective of the C Fund is to match the performance of the Standard & Poor’s 500 Stock Index, a broad market index made up of stocks of 500 large to medium-sized U.S. companies.”

Also:

“The C Fund holds all the stocks included in the S&P 500 Index in virtually the same weights that they have in the index.”

5/6. Who runs an index fund has no bearing on whether the underlying funds are substantially identical.

 

While the likelihood of an audit is low here, this is about following the law.  I can’t imagine you’d suggest that someone should cheat on their federal return because the risk of an audit is ridiculously low.

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If it bothers you, then don't do it. It doesn't bother me, nor does it appear to bother the IRS. And the IRS isn't going to decide which of us is right because they don't care.

Am I doing this? No. Because I use TSM, which is even more different from the C fund than the 500 index, despite also having a 0.98 or 0.99 correlation with it. You can avoid that too by your arguments. And Large Cap Index. And Growth Index. And Fidelity 500. And Schwab 500. All highly correlated and mostly owning the same stocks. In fact, you probably ought to quit tax-loss harvesting by exchanging and just wait 30 days and buy the same fund back.