Wash Sale in Muni Bond Fund

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Anovice
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Wash Sale in Muni Bond Fund

Post by Anovice »

I own Vanguard Long-Term Bond Fund VWLUX that currently has a small unrealized STCL and LTCL. I would like to sell VWLUX and consolidate by moving the proceeds to an existing position in Vanguard High-Yield Tax-Exempt Fund VWALX. December 30, 2021, Vanguard Long-Term declared a taxable STCG and LTCG, and 1-3-22 its non-taxable December dividend. None of the three distributions did I reinvest and all three went to cash. If I sell my complete position in VWLUX today and move the proceeds to VWALX, will I have a wash sale? Do I need to wait 31 days?

Thank you.
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iceport
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Re: Wash Sale in Muni Bond Fund

Post by iceport »

Anovice wrote: Fri Jan 21, 2022 3:37 am I own Vanguard Long-Term Bond Fund VWLUX that currently has a small unrealized STCL and LTCL. I would like to sell VWLUX and consolidate by moving the proceeds to an existing position in Vanguard High-Yield Tax-Exempt Fund VWALX. December 30, 2021, Vanguard Long-Term declared a taxable STCG and LTCG, and 1-3-22 its non-taxable December dividend. None of the three distributions did I reinvest and all three went to cash. If I sell my complete position in VWLUX today and move the proceeds to VWALX, will I have a wash sale? Do I need to wait 31 days?

Thank you.
No, you won't have a wash sale if you are left with no substantially identical replacement shares purchased within the 61-day wash sale period. In your case, you hold no shares purchased 30 days ago or less, so as long as you refrain from buying any substantially identical shares within the next 30 days, there will be no wash sale.

The Wash Sale Rule
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Topic Author
Anovice
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Re: Wash Sale in Muni Bond Fund

Post by Anovice »

iceport wrote: Fri Jan 21, 2022 7:38 am
Anovice wrote: Fri Jan 21, 2022 3:37 am I own Vanguard Long-Term Bond Fund VWLUX that currently has a small unrealized STCL and LTCL. I would like to sell VWLUX and consolidate by moving the proceeds to an existing position in Vanguard High-Yield Tax-Exempt Fund VWALX. December 30, 2021, Vanguard Long-Term declared a taxable STCG and LTCG, and 1-3-22 its non-taxable December dividend. None of the three distributions did I reinvest and all three went to cash. If I sell my complete position in VWLUX today and move the proceeds to VWALX, will I have a wash sale? Do I need to wait 31 days?

Thank you.
No, you won't have a wash sale if you are left with no substantially identical replacement shares purchased within the 61-day wash sale period. In your case, you hold no shares purchased 30 days ago or less, so as long as you refrain from buying any substantially identical shares within the next 30 days, there will be no wash sale.

The Wash Sale Rule

Thank you.

I am good looking back, as I hold no shares purchased in Vanguard Long-Term Bond Fund VWLUX within the past 30 days. When I look deeper into Vanguard High-Yield Tax-Exempt Fund VWALX, the fund I plan on adding to within the next 30 days (assuming I sell VWLUX today), I see that it has the same benchmark and average duration as Vanguard Long-Term Bond Fund VWLUX. These two bond funds are not considered substantially identical?
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iceport
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Re: Wash Sale in Muni Bond Fund

Post by iceport »

Anovice wrote: Fri Jan 21, 2022 10:04 am When I look deeper into Vanguard High-Yield Tax-Exempt Fund VWALX, the fund I plan on adding to within the next 30 days (assuming I sell VWLUX today), I see that it has the same benchmark and average duration as Vanguard Long-Term Bond Fund VWLUX. These two bond funds are not considered substantially identical?
Their benchmarks might be the same, but the benchmark for two different actively managed funds doesn't have the same significance in determining whether the two funds are substantially identical as it would with two index funds.

Strategy for VWALX:
The fund invests at least 80% of its assets in investment-grade municipal bonds, with ratings of Baa or higher (by Moody’s) or BBB or higher (by Standard & Poor’s), and up to 20% in bonds that are rated less than Baa or BBB or are unrated.
Strategy for VWLUX:
The fund has no limitations on the maturity of individual securities, but is expected to maintain a dollar-weighted average maturity of 10 to 25 years. At least 75% of the securities held by the fund are municipal bonds in the top three credit-rating categories (Aaa, Aa, and A for Moody’s Investors Service, Inc., or AAA, AA, and A for Standard & Poor’s). No more than 20% of the fund’s assets may be invested in bonds rated Baa (by Moody’s) or BBB (by Standard & Poor’s). The remaining 5% may be invested in securities with lower credit ratings or that are unrated.
Looking at the fund characteristics, they are very similar, but not the same. And the active management with somewhat different strategies should be enough to prevent these two funds from being considered substantially identical.

At least that's my opinion. None of us really knows the precise definition of the term...

(I'd actually be even more comfortable with that assessment if the same fund manager didn't happen run both funds. But I still stand by my opinion, and would be comfortable using those two funds as a TLH pair.)
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Anovice
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Re: Wash Sale in Muni Bond Fund

Post by Anovice »

A little different of a question on the related.

I decided that I am going to sell 1/2 of my position in VWLUX spec. ID to realize a loss. The lot that I am looking to sell was purchased on 1/28/2021. If I sell it in the next few days, I will realize a STCL. If I wait a few more days, I will have a LTCL. Throughout 2022, I will have a number of short and long term capital gain distributions as well as realized short and long term capital losses.

Is it preferable to realize a STCL or LTCL on this sale?

Thank you.
rkhusky
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Re: Wash Sale in Muni Bond Fund

Post by rkhusky »

STCL’s are more valuable, but require certain situations to be more beneficial than LTCL’s. Essentially, if you have more gains than losses, you would prefer offsetting STCG’s versus LTCG’s.

STCG distributions get added to dividends, so aren’t offset by cap losses, except as part of the $3K/yr income deduction.
rkhusky
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Re: Wash Sale in Muni Bond Fund

Post by rkhusky »

Have you held all your shares more than 6 months? There is a special rule for some TE funds depending on how they distribute dividends.

If the fund declares dividends daily and pays monthly, it’s not subject to the rule. Most Vanguard TE funds are in this category.

See: https://www.bogleheads.org/wiki/Tax_loss_harvesting
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Anovice
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Re: Wash Sale in Muni Bond Fund

Post by Anovice »

Even though the shares I am contemplating selling were purchased 1/28/2021, I was reinvesting the monthly dividends through 10/27/2021. But since Vanguard High-Yield Tax-Exempt Muni Bond Fund declares dividends daily and pays monthly, I am understanding that it is not subject to the 6-month rule. Is that correct?

Unfortunately, I remain confused if booking this as a STCL or LTCL would be more beneficial. In 2022, I will have considerable dividends from Vanguard Mid-Cap Index and Vanguard Total Stock Market Index. I do not believe that either pays a capital gain distribution. However, I do own (unfortunately) Vanguard Dividend Growth and Vanguard Health Care Fund in my taxable account, both which historically pay short-term capital gain and long-term-capital gain distributions in excess of the loss that I am looking to realize on Vanguard High-Yield Tax-Exempt fund. I will have more gains from both dividends and capital gain distributions than I will have losses from the sale of shares, so it appears that in this situation, realizing a STCL is more beneficial? Is that correct?

Thank you.
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iceport
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Re: Wash Sale in Muni Bond Fund

Post by iceport »

Anovice wrote: Wed Jan 26, 2022 3:21 am Even though the shares I am contemplating selling were purchased 1/28/2021, I was reinvesting the monthly dividends through 10/27/2021. But since Vanguard High-Yield Tax-Exempt Muni Bond Fund declares dividends daily and pays monthly, I am understanding that it is not subject to the 6-month rule. Is that correct?
Does this section of the wiki article help? Fine points about tax loss harvesting

Anovice wrote: Wed Jan 26, 2022 3:21 am Unfortunately, I remain confused if booking this as a STCL or LTCL would be more beneficial. In 2022, I will have considerable dividends from Vanguard Mid-Cap Index and Vanguard Total Stock Market Index. I do not believe that either pays a capital gain distribution. However, I do own (unfortunately) Vanguard Dividend Growth and Vanguard Health Care Fund in my taxable account, both which historically pay short-term capital gain and long-term-capital gain distributions in excess of the loss that I am looking to realize on Vanguard High-Yield Tax-Exempt fund. I will have more gains from both dividends and capital gain distributions than I will have losses from the sale of shares, so it appears that in this situation, realizing a STCL is more beneficial? Is that correct?
Yes. STCGs are taxed at income tax rates. So you'd rather not be in a situation in which you end up using up all LTCLs on LTCGs, but then don't have enough LTCLs left over to offset any STCGs. You'd rather have as much STCLs as possible, to minimize any STCG liabilities. If you're short on losses to offset gains at all, you'd rather be short on LTCLs than STCLs. So it's best to lock in the STCLs, if you have the opportunity to do that.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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Electron
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Re: Wash Sale in Muni Bond Fund

Post by Electron »

There may be an impact on the capital gains distributions if you don't hold the shares longer than 6 months. See this section in the Wiki.

https://www.bogleheads.org/wiki/Tax_los ... harvesting

"Second, if those shares were held while the fund distributed (long term) capital gains, then the loss is treated as a long term loss up to the dollar amount of the distribution those shares produced. Vanguard, and likely most other brokerages, will not make the correct adjustment on your IRS Form 1099-B, so you will have to correct it yourself by filing Form 8949 and changing the type of capital loss."
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rkhusky
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Re: Wash Sale in Muni Bond Fund

Post by rkhusky »

Best to realize STCL in case you need it. There is no advantage for LTCL over STCL.

But note that they won’t offset STCG distributions, only STCG’s that you realize by selling.
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