Tax Loss Harvesting and Wash Sale Rules

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mangorunner
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Tax Loss Harvesting and Wash Sale Rules

Post by mangorunner »

I purchased VTI in my taxable brokerage account on Nov 8 and Nov 29 this year. I sold all shares on Nov 30 in my first-ever attempt to tax loss harvest.

I just see now that I purchased VTSAX (the mutual fund equivalent of VTI) on Nov 17 in my Roth IRA, and on both Nov 3 and Nov 17 in my Traditional IRA.

Have I broken the 30-day wash sale rule? :oops: Thanks in advance for the help!
aristotelian
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by aristotelian »

Yes, unfortunately you have a wash sale, at least for the number of shares you purchased in the IRA. I keep my IRA holdings different from my taxable account to avoid that scenario.
Last edited by aristotelian on Wed Dec 01, 2021 11:09 am, edited 1 time in total.
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iceport
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by iceport »

mangorunner,

Yes, it certainly looks like you created a wash sale. Unfortunately, it's the worst kind: the kind that results in a permanent disallowance of claiming the loss, rather than just a temporary delay. Because the replacement shares all reside in the IRAs, there is no mechanism by which the cost basis of those wash shares can be adjusted. So when the wash shares in the IRAs are sold, you'll get no credit for the loss.

The question is, how many shares are involved?

How many shares were sold at a loss? And how many shares were purchased within the 61-day wash sale period, 30 days on either side of the sale date?

If you purchased fewer shares in the IRAs on or after October 30, then you still might have a portion of the loss that can be claimed. If you purchased more of those replacement shares in the IRAs than you sold in the taxable account, then all of the loss realized in the taxable account will be permanently disallowed.

While disappointing, it will be educational. :D
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mangorunner
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by mangorunner »

Thank you for all of the awesome replies. This was a valuable learning experience and I will get better. Doing massive amounts of reading but was also in a bit of hurry, with yesterday's market drop - and so clearly, not enough reading/research.

The purchased VTI shares in the taxable account were 30 shares + 38 shares. Sold all 68 shares at a short-term loss on Nov 30.

The purchased VTSAX in the Roth IRA on Nov 17 was 179.8 shares.

The purchased VTSAX in the Traditional IRA on Nov 3 and 17 were 461.984 shares and 179.996 shares, respectively.

Question: How does one compare ETF shares to mutual fund shares? Is it even possible?
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iceport
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by iceport »

mangorunner wrote: Wed Dec 01, 2021 11:16 am Thank you for all of the awesome replies. This was a valuable learning experience and I will get better. Doing massive amounts of reading but was also in a bit of hurry, with yesterday's market drop - and so clearly, not enough reading/research.

The purchased VTI shares in the taxable account were 30 shares + 38 shares. Sold all 68 shares at a short-term loss on Nov 30.

The purchased VTSAX in the Roth IRA on Nov 17 was 179.8 shares.

The purchased VTSAX in the Traditional IRA on Nov 3 and 17 were 461.984 shares and 179.996 shares, respectively.
Ouch. Okay, so all of the loss washes out with the shares purchased within the wash sale period, and you will not be able to legally claim any of the losses realized in the taxable account. (Specifically, the 68 shares sold at a loss wash out with 68 of the 461.984 shares purchased on 11/3 in the tIRA. Wash shares are matched chronologically with replacement shares.) Maybe one of the most bothersome aspects of your situation is that you will need to report the wash sale on your own. Your broker will almost certainly not report the taxable sale as a wash sale.

mangorunner wrote: Wed Dec 01, 2021 11:16 am Question: How does one compare ETF shares to mutual fund shares? Is it even possible?
Shares sold at a loss are matched directly, one-for-one, with the wash shares, even if they involve a mix of traditional MF and ETF shares with different costs per share. What matters for tax purposes are the dollars invested (cost basis) and gains and losses, not specific per-share values of the assets. If they meet the test of being substantially identical, all shares involved should be assumed to rise and fall simultaneously by the same percentages, producing the same gains and/or losses per dollar invested. Any differences in per-share costs wash out for tax purposes. If your taxable losses had washed with taxable purchases, the cost basis adjustments of the replacement shares would make you whole eventually based on per-share losses, regardless of any differences in per-share market values.

At least that's what I would assume, though in full disclosure, I've never really had to consider this question.
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rai
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by rai »

I have a question, if I had an E*TRADE and a Vanguard account, and sold/bought within the wash rule period but one was in a retirement account. How would it be possible for the IRS to determine? Surely they are not looking at every transaction across multiple platforms.

Is it just the honor system?
Last edited by rai on Wed Dec 01, 2021 1:16 pm, edited 1 time in total.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by livesoft »

mangorunner wrote: Wed Dec 01, 2021 11:16 am Question: How does one compare ETF shares to mutual fund shares? Is it even possible?
While that is a good question, you might have MONTHS if not YEARS to figure it out. I think based on the facts you stated, ALL your loss may be DISALLOWED, so filling out your tax return will be trivial: Just be sure NOT to claim a loss on your tax return for the shares you sold in your taxable account. It cannot get any easier than that!

In order to compare VTI to VTSAX one can use the ratios of their NAVs on any given day which can be looked up online.
Last edited by livesoft on Wed Dec 01, 2021 1:18 pm, edited 1 time in total.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by surfstar »

rai wrote: Wed Dec 01, 2021 1:11 pm I have a question, if I had an E*TRADE and a Vanguard account, and sold/bought within the wash rule period but one was in a retirement account. How would it be possible for the IRS to determine? Surely they are not looking at every transaction across multiple platforms.

I’d it just the honor system?
Most of filing taxes is the honor system. Until it isn't.

Are you asking "for a friend" or are you planning on testing the system?

It is not hard to hold slightly different funds in taxable accounts and easily avoid wash rules. Very easy. Just takes a few mins of reading prior to starting your taxable account.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by Nate79 »

rai wrote: Wed Dec 01, 2021 1:11 pm I have a question, if I had an E*TRADE and a Vanguard account, and sold/bought within the wash rule period but one was in a retirement account. How would it be possible for the IRS to determine? Surely they are not looking at every transaction across multiple platforms.

Is it just the honor system?
It's very easy to commit tax fraud.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by grabiner »

rai wrote: Wed Dec 01, 2021 1:11 pm I have a question, if I had an E*TRADE and a Vanguard account, and sold/bought within the wash rule period but one was in a retirement account. How would it be possible for the IRS to determine? Surely they are not looking at every transaction across multiple platforms.

Is it just the honor system?
Brokerages are only required to report a specific wash sale situation: when you sell and buy identical securities in the same account. The actual rule is much broader, as it applies to substantially identical securities, in any accounts, and often to options on those securities. You swear when you fill out your tax return that you have filled it out properly. Thus, if you claim a capital loss, you are certifying that, to the best of your knowledge, you did not buy anything substantially identical within the 30-day period.
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mangorunner
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by mangorunner »

Thanks to all who helped me here. While I lost a tax loss harvest, I gained a lot of valuable knowledge. I'll hopefully get it right next time.
H-Town
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Re: Tax Loss Harvesting and Wash Sale Rules

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mangorunner wrote: Sat Dec 04, 2021 9:20 am Thanks to all who helped me here. While I lost a tax loss harvest, I gained a lot of valuable knowledge. I'll hopefully get it right next time.
well... I don't see anyone suggested you to exchange VTSAX fund in your Roth IRA and Traditional IRA into maybe S&P 500 funds (VOO). If you sell all those VTI shares in your Roth IRA and Traditional IRA that were bought within 30 days, you don't have a wash sale issue, correct?
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by livesoft »

H-Town wrote: Sat Dec 04, 2021 10:46 am well... I don't see anyone suggested you to exchange VTSAX fund in your Roth IRA and Traditional IRA into maybe S&P 500 funds (VOO). If you sell all those VTI shares in your Roth IRA and Traditional IRA that were bought within 30 days, you don't have a wash sale issue, correct?
Not if you do this after the wash sale has happened by selling for a loss in your taxable account. If one had done that BEFORE selling for a loss in the taxable account, then I think it would have been OK. But after you pin the disallowed loss on the shares in the tax-advantaged accounts, then sell shares in the tax-advantaged accounts what happens? Except for a non-deductible traditional IRA, the concept of "cost basis" in a Roth or traditional IRA does not apply.
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H-Town
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by H-Town »

livesoft wrote: Sat Dec 04, 2021 10:54 am
H-Town wrote: Sat Dec 04, 2021 10:46 am well... I don't see anyone suggested you to exchange VTSAX fund in your Roth IRA and Traditional IRA into maybe S&P 500 funds (VOO). If you sell all those VTI shares in your Roth IRA and Traditional IRA that were bought within 30 days, you don't have a wash sale issue, correct?
Not if you do this after the wash sale has happened by selling for a loss in your taxable account. If one had done that BEFORE selling for a loss in the taxable account, then I think it would have been OK. But after you pin the disallowed loss on the shares in the tax-advantaged accounts, then sell shares in the tax-advantaged accounts what happens? Except for a non-deductible traditional IRA, the concept of "cost basis" in a Roth or traditional IRA does not apply.
It's true that the basis adjustment due to wash sale is lost forever since there is no concept of "cost basis" in Roth or traditional IRA. But should this "technicality" prevent the OP to deduct the capital loss? I honestly don't know. When I look at the transactions for the whole year, if I don't see the OP would still hold "replacement shares" within 30 days window, the loss should be deductible. But that is just my position. I'm curious to see how Vanguard would handle this reporting.

I looked at Pub 550 and it doesn't have an example for this situation.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by Lee_WSP »

H-Town wrote: Sat Dec 04, 2021 11:09 am
livesoft wrote: Sat Dec 04, 2021 10:54 am
H-Town wrote: Sat Dec 04, 2021 10:46 am well... I don't see anyone suggested you to exchange VTSAX fund in your Roth IRA and Traditional IRA into maybe S&P 500 funds (VOO). If you sell all those VTI shares in your Roth IRA and Traditional IRA that were bought within 30 days, you don't have a wash sale issue, correct?
Not if you do this after the wash sale has happened by selling for a loss in your taxable account. If one had done that BEFORE selling for a loss in the taxable account, then I think it would have been OK. But after you pin the disallowed loss on the shares in the tax-advantaged accounts, then sell shares in the tax-advantaged accounts what happens? Except for a non-deductible traditional IRA, the concept of "cost basis" in a Roth or traditional IRA does not apply.
It's true that the basis adjustment due to wash sale is lost forever since there is no concept of "cost basis" in Roth or traditional IRA. But should this "technicality" prevent the OP to deduct the capital loss? I honestly don't know. When I look at the transactions for the whole year, if I don't see the OP would still hold "replacement shares" within 30 days window, the loss should be deductible. But that is just my position. I'm curious to see how Vanguard would handle this reporting.

I looked at Pub 550 and it doesn't have an example for this situation.
The code is uncompromising. The loss is disallowed as substantially identical shares were purchased within 30 days of the loss. So far, the IRS has not specifically addressed 401k accounts as they have IRA's.

See Rev. Rul. 2008-5
Last edited by Lee_WSP on Sat Dec 04, 2021 2:47 pm, edited 2 times in total.
stan1
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by stan1 »

mangorunner wrote: Wed Dec 01, 2021 10:43 am I purchased VTI in my taxable brokerage account on Nov 8 and Nov 29 this year. I sold all shares on Nov 30 in my first-ever attempt to tax loss harvest.

I just see now that I purchased VTSAX (the mutual fund equivalent of VTI) on Nov 17 in my Roth IRA, and on both Nov 3 and Nov 17 in my Traditional IRA.
The way I mostly avoid this problem is I put S&P 500 Index into our retirement accounts where there are automated purchases and dividend reinvestments and Total Stock Market ETFs into taxable accounts.

The performance of Index 500 and Total Stock Market is almost identical. You could also use Large Cap Index or another ETF such as ITOT, SCHB, or SPTM (many others, too).
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by stan1 »

Lee_WSP wrote: Sat Dec 04, 2021 11:13 am So far, the IRS has not exempted IRA accounts as they have 401k accounts.
Are 401Ks exempted, or just not explicitly addressed (left open)? Not addressing them is not quite the same as stating they are exempt and not to be considered.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by Lee_WSP »

stan1 wrote: Sat Dec 04, 2021 11:20 am
Lee_WSP wrote: Sat Dec 04, 2021 11:13 am see original
Are 401Ks exempted, or just not explicitly addressed (left open)? Not addressing them is not quite the same as stating they are exempt and not to be considered.
Fixed.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by stan1 »

Lee_WSP wrote: Sat Dec 04, 2021 11:13 am
The code is uncompromising. The loss is disallowed as substantially identical shares were purchased within 30 days of the loss. So far, the IRS has not specifically addressed 104k accounts as they have IRA's.

See Rev. Rul. 2008-5
Of course Kitces is risk averse and says based on Congressional intent he'd presume it would apply to employer sponsored plans, too:
https://www.kitces.com/blog/irs-shuts-d ... technique/

(he responded to a question about employer sponsored plans in the comments)

I'm more in the camp of "the IRS will contact me if they need to" on the gray areas of wash sales, but I'm not a licensed professional posting on the internet and giving advice to clients for compensation.
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Lee_WSP
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by Lee_WSP »

stan1 wrote: Sat Dec 04, 2021 11:50 am
Lee_WSP wrote: Sat Dec 04, 2021 11:13 am
The code is uncompromising. The loss is disallowed as substantially identical shares were purchased within 30 days of the loss. So far, the IRS has not specifically addressed 104k accounts as they have IRA's.

See Rev. Rul. 2008-5
Of course Kitces is risk averse and says based on Congressional intent he'd presume it would apply to employer sponsored plans, too:
https://www.kitces.com/blog/irs-shuts-d ... technique/

(he responded to a question about employer sponsored plans in the comments)

I'm more in the camp of "the IRS will contact me if they need to" on the gray areas of wash sales, but I'm not a licensed professional posting on the internet and giving advice to clients for compensation.
I personally agree with Kitces. If you read the logic in the ruling, the crux of the disallowance is the fact that the individual has control over the assets in question. While a 401k is a little more removed than an IRA and may have additional bumper lanes, the fact remains that the individual controls (at least to some extent) the assets in the account. Furthermore, I simply cannot see how a 401k would have substantially identical ETF's or mutual funds in the account if the participant did not have full or nearly full control over both accounts. Although, it could happen: employer designates these 5 funds and you choose to mirror your 401k in your taxable.

That said, I do trusts & estates, not tax law.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by rkhusky »

The tax code doesn’t mention any particular types of accounts. I take that to mean that the wash rule applies to all your accounts.

Over the years the IRS and tax courts have addressed different types of accounts. In each case, the wash sale rule was deemed to apply. Just because employer-managed plans haven’t yet been specially addressed doesn’t mean that the wash sale statute doesn’t apply, i.e. non-application is not the default.
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Re: Tax Loss Harvesting and Wash Sale Rules

Post by Nate79 »

Eh, count me in the camp of 401k is not and probably will never be included in the accounts for wash sales and for numerous reasons. If the IRS or the courts specifically rule on it saying it is included then fine. Until then this is a nonissue. I would be more worried if the 401k is self directed with full trading authority and access to a brokerage link with all ETFs/mutual funds. But for employer plans like mine with limited choices and limited/no control over trading dates, who cares.
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