Please sanity check my TLH move

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Topic Author
northfork
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Please sanity check my TLH move

Post by northfork »

Hi Bogleheads,

Never tried to TLH but want to start as I have quite a few gains this year I’d like to offset.

The funds I’d like to sell at a loss are:

VXUS - Vanguard Total International ETF
FZILX - Fidelity Zero International Index Fund

Both would be short term losses.

NOTE - I also own FZILX in a brokeragelink account attached to my 401k.

I’d like to TLH the VXUS position by selling it and immediately buying IXUS (I-Shares core MSCI total international etf) . I think this is fine (no wash sale - please correct me if I’m wrong) but have a question:

I’ve never sold a position this large (low 6 figures). Is there any potential problems with my assumption that this sale will execute immediately and that I can use the unsettled proceeds from the sale to fund an immediate purchase of a same size IXUS position? I’m at Fidelity.

Second question. I’d also like to TLH the FZILX position but I’m thinking this would be risky because I also own FZILX in tax deferred (and it just threw off dividends that reinvested in tax deferred (not on taxable though) Am I correct in thinking I should NOT TLH the FZILX position in taxable due to potential wash sale?

Thanks!
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grabiner
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Re: Please sanity check my TLH move

Post by grabiner »

VXUS is liquid enough that you can probably sell a 6-figure amount without moving the market. You might use a limit order to be safe.

If you harvest the loss in FZILX, and buy shares in your 401(k) with reinvested dividends, you will have a wash sale, but only for the number of shares you reinvest. (There are conflicting opinions as to whether you can have a wash sale with a 401(k); ask your tax advisor). There are several possibilities:

1. Just accept the lost wash; it's likely only a small portion of the shares.

2. Turn off dividend reinvestment in the 401(k), so that the dividend goes to the settlement fund (and you can use it to buy something else).

3. If you can't turn off dividend reinvestment, sell your entire position before the record date of the dividend, so that there won't be any dividend to reinvest. Do not buy back into the fund until 31 days after you did your harvest.

4. Wait until 31 days after the dividend reinvestment, so there will be no wash.

(As a separate note, you should harvest losses whether you have gains to offset or not. Capital losses can offset $3000 per year of ordinary income, and gains in future years.)
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Re: Please sanity check my TLH move

Post by Jack&Warren disciple »

northfork wrote: Sun Dec 05, 2021 4:36 pm Hi Bogleheads,

Never tried to TLH but want to start as I have quite a few gains this year I’d like to offset.

The funds I’d like to sell at a loss are:

VXUS - Vanguard Total International ETF
FZILX - Fidelity Zero International Index Fund

Both would be short term losses.

NOTE - I also own FZILX in a brokeragelink account attached to my 401k.

I’d like to TLH the VXUS position by selling it and immediately buying IXUS (I-Shares core MSCI total international etf) . I think this is fine (no wash sale - please correct me if I’m wrong) but have a question:

I’ve never sold a position this large (low 6 figures). Is there any potential problems with my assumption that this sale will execute immediately and that I can use the unsettled proceeds from the sale to fund an immediate purchase of a same size IXUS position? I’m at Fidelity.

Second question. I’d also like to TLH the FZILX position but I’m thinking this would be risky because I also own FZILX in tax deferred (and it just threw off dividends that reinvested in tax deferred (not on taxable though) Am I correct in thinking I should NOT TLH the FZILX position in taxable due to potential wash sale?

Thanks!
Grabnier really knows his stuff on this subject, Iceport is another sharp one as well, I asked a Question about Wash Sale the other day and Iceport found this cheat sheet which he graciously shared: "191. While trying to discern the Wash Sale Rule, industry practitioners have developed a list of four mutual fund transactions that are ―generally considered to be acceptable‖ under Section 1091. Lee C. McGowan, Tax-Loss Harvesting: The Rebalancing Act, J. FIN. PLAN. E-NEWSLETTER (Dec. 2008), http://www.fpajournal.org/BetweentheIss ... ebalancing
Act/. This list includes the following:

1. Sell one index fund and buy another index fund, if the indexes of the two funds are not the same index (e.g., S&P 500 for Russell 1000).
2. Sell one actively managed fund and buy a fund at another company with different portfolio managers.
3. Sell an index fund and buy an actively managed fund regardless of the fund company.
4. Sell an actively managed fund and buy an index fund regardless of the fund company."

I hope this helps some and from what I understand this subject area seems low on the priority list at IRS but if the proposed legislation results in 87,000 newly minted IRS agents (double their current size) they are going to need something to do. Like you I am getting ready to do this for the first time in my life soon. Good luck to you.
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grabiner
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Re: Please sanity check my TLH move

Post by grabiner »

Jack&Warren disciple wrote: Sun Dec 05, 2021 9:45 pm Grabnier really knows his stuff on this subject, Iceport is another sharp one as well,
This is a good reminder not to treat anything I (or anyone else) says on this forum as tax advice. I am interested in tax issues because I have large taxable, deferred, and Roth accounts and want to optimize them, but I am not an expert in tax law.

This is particularly the case for the wash sale rule. The IRS has never clarified a lot of issues, and you will find a variety of opinions even among tax experts.
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anon_investor
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Re: Please sanity check my TLH move

Post by anon_investor »

grabiner wrote: Sun Dec 05, 2021 11:10 pm
Jack&Warren disciple wrote: Sun Dec 05, 2021 9:45 pm Grabnier really knows his stuff on this subject, Iceport is another sharp one as well,
This is a good reminder not to treat anything I (or anyone else) says on this forum as tax advice. I am interested in tax issues because I have large taxable, deferred, and Roth accounts and want to optimize them, but I am not an expert in tax law.

This is particularly the case for the wash sale rule. The IRS has never clarified a lot of issues, and you will find a variety of opinions even among tax experts.
There is no settled law as to whether 401k transactions can cause a wash sale. IRAs yes.
Topic Author
northfork
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Re: Please sanity check my TLH move

Post by northfork »

Thanks everyone, the information is very helpful!

I'm holding off on the TLH atm as vxus is up nearly 1% today - substantially reducing my loss and I think I'll engage in some market timing. I figure the more I do this the more likely it'll be that I screw something up so I'm going to hold off until/if I get a somewhat larger loss.

That said, I have a follow up question.

The FZILX position in my Brokeragelink account just had dividends distribution (like days ago - on 12/3). My understanding is that if I sell my FZILX position in taxable now, even though the dividend reinvestment is now 'in the past' and prior to the sale of the taxable position, it will still be a wash sale as the purchase of substantially identical looks back and forward 30 days. Tricky... Let me know if this is an incorrect interpretation of what I'm reading.

Assuming this ^ is true, I think, as a principal, maybe it's best not to hold substantially identical securities in both tax deferred and taxable if one is going to be tax loss harvesting. It increases the likelihood of an inadvertent wash sale - would you agree?. If so, an action item for me is to clean up those toxic pairings between taxable in tax deferred as soon as practical. I am Taking into consideration what's been said about settled law with wash sales involving 401ks but perhaps erring on side of caution.

Thanks!
lazynovice
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Re: Please sanity check my TLH move

Post by lazynovice »

northfork wrote: Mon Dec 06, 2021 1:03 pm

…. I figure the more I do this the more likely it'll be that I screw something up so I'm going to hold off until/if I get a somewhat larger loss.

Perhaps, but you’ll get more comfortable

That said, I have a follow up question.

The FZILX position in my Brokeragelink account just had dividends distribution (like days ago - on 12/3). My understanding is that if I sell my FZILX position in taxable now, even though the dividend reinvestment is now 'in the past' and prior to the sale of the taxable position, it will still be a wash sale as the purchase of substantially identical looks back and forward 30 days. Tricky... Let me know if this is an incorrect interpretation of what I'm reading.

Debate about 401(k)s aside, yes that’s the rule

Assuming this ^ is true, I think, as a principal, maybe it's best not to hold substantially identical securities in both tax deferred and taxable if one is going to be tax loss harvesting. It increases the likelihood of an inadvertent wash sale - would you agree?. If so, an action item for me is to clean up those toxic pairings between taxable in tax deferred as soon as practical. I am Taking into consideration what's been said about settled law with wash sales involving 401ks but perhaps erring on side of caution.

Yes, that’s the advice here generally. Turning off dividend reinvestment is another way to prevent this which can be done in an IRA but not a 401(k)

Thanks!
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anon_investor
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Re: Please sanity check my TLH move

Post by anon_investor »

northfork wrote: Mon Dec 06, 2021 1:03 pm Thanks everyone, the information is very helpful!

I'm holding off on the TLH atm as vxus is up nearly 1% today - substantially reducing my loss and I think I'll engage in some market timing. I figure the more I do this the more likely it'll be that I screw something up so I'm going to hold off until/if I get a somewhat larger loss.

That said, I have a follow up question.

The FZILX position in my Brokeragelink account just had dividends distribution (like days ago - on 12/3). My understanding is that if I sell my FZILX position in taxable now, even though the dividend reinvestment is now 'in the past' and prior to the sale of the taxable position, it will still be a wash sale as the purchase of substantially identical looks back and forward 30 days. Tricky... Let me know if this is an incorrect interpretation of what I'm reading.

Assuming this ^ is true, I think, as a principal, maybe it's best not to hold substantially identical securities in both tax deferred and taxable if one is going to be tax loss harvesting. It increases the likelihood of an inadvertent wash sale - would you agree?. If so, an action item for me is to clean up those toxic pairings between taxable in tax deferred as soon as practical. I am Taking into consideration what's been said about settled law with wash sales involving 401ks but perhaps erring on side of caution.

Thanks!
Can you sell specific purchase lots of FZILX in your 401k brokeragelink account? If you can, if you just sell the offending purchase lot from the dividend reinvestment BEFORE you attempt to TLH FZILX in your taxable account, that would be 1 way to avoid the wash sale. If you cannot sell individual purchase lots, then you could sell your entire FZILX position in your 401k brokeragelink account before you TLH FZILX in your taxable.
rkhusky
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Re: Please sanity check my TLH move

Post by rkhusky »

What was the size of the dividend? If it was small, you might not want to worry too much about avoiding the wash. (Grabiner’s point 1)

Wash sales are on a share by share basis. For example, if the dividend was worth 10 shares and your loss was equal to $1/share (on the oldest 10 shares sold with a loss), you would be out $10.
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Re: Please sanity check my TLH move

Post by rkhusky »

anon_investor wrote: Sun Dec 05, 2021 11:48 pm
There is no settled law as to whether 401k transactions can cause a wash sale. IRAs yes.
The wash sale law does not differentiate account types, so it applies to all account types, unless an exception is provided. There are no recorded exceptions for 401k’s and I don’t know of any current challenges in the tax court.

While there are opinions that some or all 401k plans should be exempted, neither Congress nor the IRS have provided an exception.
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Re: Please sanity check my TLH move

Post by anon_investor »

rkhusky wrote: Mon Dec 06, 2021 3:38 pm
anon_investor wrote: Sun Dec 05, 2021 11:48 pm
There is no settled law as to whether 401k transactions can cause a wash sale. IRAs yes.
The wash sale law does not differentiate account types, so it applies to all account types, unless an exception is provided. There are no recorded exceptions for 401k’s and I don’t know of any current challenges in the tax court.

While there are opinions that some or all 401k plans should be exempted, neither Congress nor the IRS have provided an exception.
There certainly is no consesus whether transactions within 401k plans trigger a wash sale. We know transactions within a IRA do
(See https://www.irs.gov/irb/2008-03_IRB#RR-2008-5). It is also not settled law as to whether "substantially identical" means either. Some might argue that VXUS and IXUS are substantially identical as they currently have an 89% overlap. Some would say they are not substantially identical because they track different indexes and are issued by different issuers. But it never hurts to be on the safe side and assume 401k plans can trigger a wash sale.
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Re: Please sanity check my TLH move

Post by rkhusky »

anon_investor wrote: Mon Dec 06, 2021 4:27 pm There certainly is no consesus whether transactions within 401k plans trigger a wash sale. We know transactions within a IRA do
(See https://www.irs.gov/irb/2008-03_IRB#RR-2008-5).
True. There is no consensus of opinions. But the law is quite straightforward, as seen here: https://www.law.cornell.edu/uscode/text/26/1091 (part (a) is the relevant paragraph). The wiki has further info: https://www.bogleheads.org/wiki/Wash_sale.
anon_investor wrote: Mon Dec 06, 2021 4:27 pm It is also not settled law as to whether "substantially identical" means either. Some might argue that VXUS and IXUS are substantially identical as they currently have an 89% overlap. Some would say they are not substantially identical because they track different indexes and are issued by different issuers. But it never hurts to be on the safe side and assume 401k plans can trigger a wash sale.
Substantially identical is a completely different matter since Congress and the IRS have neglected to define the term and there are only hints as to what it means from a few bond sale cases. In any case, those that don't want the wash sale rule to apply to employer plans want to be able to buy identical replacement investments when selling for a loss in taxable (e.g. sell VTI for a loss in taxable and immediately purchase VTI in their 401k), which seems completely contrary to the spirit and letter of the wash sale law.
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Re: Please sanity check my TLH move

Post by livesoft »

Since trades are free, I suggest you divide your sale transaction up into 2 or 3 smaller transactions just for fun. One can be a market order, another a marketable limit order, and a third a non-marketable limit order. If the last one doesn't execute in a few minutes, then you can just cancel it and replace with a different order. All this is mostly so you learn how you feel about all these different kinds of orders and get to experience them with virtually no negative consequences.

And you can buy IXUS with more than one order as well.

Just for fun and gaining some experience.
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anon_investor
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Re: Please sanity check my TLH move

Post by anon_investor »

rkhusky wrote: Mon Dec 06, 2021 8:27 pm
anon_investor wrote: Mon Dec 06, 2021 4:27 pm There certainly is no consesus whether transactions within 401k plans trigger a wash sale. We know transactions within a IRA do
(See https://www.irs.gov/irb/2008-03_IRB#RR-2008-5).
True. There is no consensus of opinions. But the law is quite straightforward, as seen here: https://www.law.cornell.edu/uscode/text/26/1091 (part (a) is the relevant paragraph). The wiki has further info: https://www.bogleheads.org/wiki/Wash_sale.
anon_investor wrote: Mon Dec 06, 2021 4:27 pm It is also not settled law as to whether "substantially identical" means either. Some might argue that VXUS and IXUS are substantially identical as they currently have an 89% overlap. Some would say they are not substantially identical because they track different indexes and are issued by different issuers. But it never hurts to be on the safe side and assume 401k plans can trigger a wash sale.
Substantially identical is a completely different matter since Congress and the IRS have neglected to define the term and there are only hints as to what it means from a few bond sale cases. In any case, those that don't want the wash sale rule to apply to employer plans want to be able to buy identical replacement investments when selling for a loss in taxable (e.g. sell VTI for a loss in taxable and immediately purchase VTI in their 401k), which seems completely contrary to the spirit and letter of the wash sale law.
The OP can just avoid the whole wash sale issue by selling FZILX in the 401k first and buying something not held in taxable, say a day before doing any TLH. Since no offending FZILX shares will be held at the time of the TLH, there is no wash sale.
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Re: Please sanity check my TLH move

Post by Jack&Warren disciple »

grabiner wrote: Sun Dec 05, 2021 11:10 pm
Jack&Warren disciple wrote: Sun Dec 05, 2021 9:45 pm Grabnier really knows his stuff on this subject, Iceport is another sharp one as well,
This is a good reminder not to treat anything I (or anyone else) says on this forum as tax advice. I am interested in tax issues because I have large taxable, deferred, and Roth accounts and want to optimize them, but I am not an expert in tax law.

This is particularly the case for the wash sale rule. The IRS has never clarified a lot of issues, and you will find a variety of opinions even among tax experts.
"This is a good reminder not to treat anything I (or anyone else) says on this forum as tax advice. I am interested in tax issues because I have large taxable, deferred, and Roth accounts and want to optimize them, but I am not an expert in tax law."

Great opportunity to remind the posters of the Forum Polices Section from above: "No guarantees are made as to the accuracy of the information on this site or the appropriateness of any advice to your particular situation."

This is an area where the IRS and the tax courts have been largely absent, especially in defining the definition of "Substantially Identical". I'm guessing because when you sell the harvested tax losses and replace them with an economically similar stock or etf (not the same exact index) they will get the same amount of money IF the economically similar stock or etf increases in value when you sell it. With a possible doubling in size of the IRS in the not to distant future, it may be a good idea to lean to the less risky and moderate risky approaches which many stock brokers and others (Schwab, Fidelity, etc. and Blackrock) readily post on their websites and can easily be found by searching the internet.
Topic Author
northfork
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Re: Please sanity check my TLH move

Post by northfork »

Hey Folks,

Just a quick update and thanks for all your help.

Well, all the ex-us soaring as of late eliminated my loss in vxus to I didn't do anything there. If it goes south again I'll know better what to do.

As for the FZILX positions, I did take action (and predictably messed up - just a little bit though). In addition to the TLH I wanted to take the opportunity to clean up my taxable account a little by folding FZILX into VXUS (thus getting rid of a non portable, non etf fund in taxable and collapsing my ex-us taxable holding to a single fund).

I acted hastily and ended up with a small wash sale: the small position in my Brokeragelink account reinvested about 30 shares worth of dividends on 12/3 so indeed it's a true wash (leaving the debate about 401k aside). The majority of the ~5500 shares I sold in taxable can still be harvested if I understand correctly.

I'll account for this on my yearly taxes - whether it's truly necessary or not - and use it as a learning opportunity.

Thanks all!
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Re: Please sanity check my TLH move

Post by lazynovice »

rkhusky wrote: Mon Dec 06, 2021 8:27 pm
anon_investor wrote: Mon Dec 06, 2021 4:27 pm There certainly is no consesus whether transactions within 401k plans trigger a wash sale. We know transactions within a IRA do
(See https://www.irs.gov/irb/2008-03_IRB#RR-2008-5).
True. There is no consensus of opinions. But the law is quite straightforward, as seen here: https://www.law.cornell.edu/uscode/text/26/1091 (part (a) is the relevant paragraph). The wiki has further info: https://www.bogleheads.org/wiki/Wash_sale.
anon_investor wrote: Mon Dec 06, 2021 4:27 pm It is also not settled law as to whether "substantially identical" means either. Some might argue that VXUS and IXUS are substantially identical as they currently have an 89% overlap. Some would say they are not substantially identical because they track different indexes and are issued by different issuers. But it never hurts to be on the safe side and assume 401k plans can trigger a wash sale.
Substantially identical is a completely different matter since Congress and the IRS have neglected to define the term and there are only hints as to what it means from a few bond sale cases. In any case, those that don't want the wash sale rule to apply to employer plans want to be able to buy identical replacement investments when selling for a loss in taxable (e.g. sell VTI for a loss in taxable and immediately purchase VTI in their 401k), which seems completely contrary to the spirit and letter of the wash sale law.
There is enough ambiguity that there is pending legislation adding multiple paragraphs to that section spelling out what “related parties” are to include HSAs, 529s, 401(k)s, 457s, IRAs, spousal accounts etc. Like the Back Door Roth step doctrine debate, this may be settled soon. Then what will we debate?
rkhusky
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Re: Please sanity check my TLH move

Post by rkhusky »

lazynovice wrote: Sat Dec 11, 2021 2:20 pm
rkhusky wrote: Mon Dec 06, 2021 8:27 pm
anon_investor wrote: Mon Dec 06, 2021 4:27 pm There certainly is no consesus whether transactions within 401k plans trigger a wash sale. We know transactions within a IRA do
(See https://www.irs.gov/irb/2008-03_IRB#RR-2008-5).
True. There is no consensus of opinions. But the law is quite straightforward, as seen here: https://www.law.cornell.edu/uscode/text/26/1091 (part (a) is the relevant paragraph). The wiki has further info: https://www.bogleheads.org/wiki/Wash_sale.
anon_investor wrote: Mon Dec 06, 2021 4:27 pm It is also not settled law as to whether "substantially identical" means either. Some might argue that VXUS and IXUS are substantially identical as they currently have an 89% overlap. Some would say they are not substantially identical because they track different indexes and are issued by different issuers. But it never hurts to be on the safe side and assume 401k plans can trigger a wash sale.
Substantially identical is a completely different matter since Congress and the IRS have neglected to define the term and there are only hints as to what it means from a few bond sale cases. In any case, those that don't want the wash sale rule to apply to employer plans want to be able to buy identical replacement investments when selling for a loss in taxable (e.g. sell VTI for a loss in taxable and immediately purchase VTI in their 401k), which seems completely contrary to the spirit and letter of the wash sale law.
There is enough ambiguity that there is pending legislation adding multiple paragraphs to that section spelling out what “related parties” are to include HSAs, 529s, 401(k)s, 457s, IRAs, spousal accounts etc. Like the Back Door Roth step doctrine debate, this may be settled soon. Then what will we debate?
I'll take more clarity in tax law over arguing.
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LilyFleur
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Re: Please sanity check my TLH move

Post by LilyFleur »

Has anyone on this thread been audited by the IRS in the last couple of years?
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