VTSAX to VLCAX to VFIAX in Taxable??

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zeldak
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Joined: Tue May 26, 2020 10:30 am

VTSAX to VLCAX to VFIAX in Taxable??

Post by zeldak »

Can the following funds be used as tax loss harvest partners in a taxable account without fear of creating a wash sale?

VTSAX Total Stock Market Index Fund
VLCAX Large Cap Index Fund
VFIAX 500 Index Fund

I have been reading many of the recent posts regarding TLH. With many thanks to the BH community's collective knowledge I felt brave enough a few weeks ago to do my first TLH, exchanging VTSAX to VLCAX in my Vanguard Taxable account.

I know to keep an eye on the Vanguard fund's dividend distribution schedule. Taxable dividends currently go to Federal MM Fund.

If the market continues to fall, can I exchange the VLCAX to VFIAX?

And if the market falls further can I exchange VFIAX back to VTSAX (after more than 31 days from the initial TLH sale of VTSAX) without fear of a wash sale?

Unless I misunderstand, a recent comment got me concerned that VTSAX to VFIAX could be considered a wash sale.

Thank you BHs!!
mega317
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Joined: Tue Apr 19, 2016 10:55 am

Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by mega317 »

My understanding is
1. Many people use the exact funds you have suggested.
2. A minority feel this may be too close for comfort and/or against the spirit of the rules.
3. The IRS has not given guidance specific enough to know for sure.
4. If you were to do this, get audited, and get busted and required to pay back taxes with interest and penalties, you would be the first ever here and a celebrity on this website.
If that happened and you started a gofundme I’d contribute.
quietseas
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Joined: Fri Dec 27, 2013 3:43 pm

Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by quietseas »

The IRS has had decades to let us know if what you describe is a wash sale or not. They haven't done so. You can wait decades more for them to make their sentiments known publicly, or you can move out knowing they have said nothing publicly that would prohibit what you propose.

So you are on your own to decide what your risk tolerance is. Vanguard will not report sales between the three funds you've identified as a wash sale. A very risk averse accountant would tell you "tread carefully".

As for me, I've tax loss harvested between those funds and also between total/broad market ETFs including VTI, ITOT, and SCHB. I've also tax loss harvested between VIOV and IJS (both S&P 600 Value ETFs), although some would feel that is cutting it too close. Bottom line is you get to decide.
Topic Author
zeldak
Posts: 143
Joined: Tue May 26, 2020 10:30 am

Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by zeldak »

mega317 wrote: Sun May 22, 2022 9:55 am My understanding is
1. Many people use the exact funds you have suggested.
2. A minority feel this may be too close for comfort and/or against the spirit of the rules.
3. The IRS has not given guidance specific enough to know for sure.
4. If you were to do this, get audited, and get busted and required to pay back taxes with interest and penalties, you would be the first ever here and a celebrity on this website.
If that happened and you started a gofundme I’d contribute.
You're awesome! I nearly spit out my coffee, laughing as I read this.
dbr
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Joined: Sun Mar 04, 2007 8:50 am

Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by dbr »

It is an observation that the IRS is not enforcing any concept of different mutual funds being substantially identical even though a person could argue that some funds should be so considered by reading of the law. The point is that what anyone on this forum, writing a blog, or anything of the kind thinks or says about what is or isn't substantially identical is completely irrelevant to how your transaction might be treated.

I have no tax advice to offer and if I did you shouldn't take it.

An option for a person who is worried about this is to simply hold cash for the 30 day wait period and repurchase the original holding. There is no debate whatsoever that this would avoid any wash sale concern.

Another option is to do the transactions and then take the IRS to court for failing to enforce the law if your plausibly substantially identical transaction goes unchecked. At least then we would all get an answer. Another option is to do the transaction and then write a complaint to Charles Rettig to ask for an explanation for why your transaction was not flagged. Along the same lines one could initiate such a request with one's Congressperson.
dbr
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Joined: Sun Mar 04, 2007 8:50 am

Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by dbr »

zeldak wrote: Sun May 22, 2022 10:00 am
mega317 wrote: Sun May 22, 2022 9:55 am My understanding is
1. Many people use the exact funds you have suggested.
2. A minority feel this may be too close for comfort and/or against the spirit of the rules.
3. The IRS has not given guidance specific enough to know for sure.
4. If you were to do this, get audited, and get busted and required to pay back taxes with interest and penalties, you would be the first ever here and a celebrity on this website.
If that happened and you started a gofundme I’d contribute.
You're awesome! I nearly spit out my coffee, laughing as I read this.
Yep, I would be all in on gofundme.
quietseas
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Joined: Fri Dec 27, 2013 3:43 pm

Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by quietseas »

dbr wrote: Sun May 22, 2022 10:03 am
zeldak wrote: Sun May 22, 2022 10:00 am
mega317 wrote: Sun May 22, 2022 9:55 am My understanding is
1. Many people use the exact funds you have suggested.
2. A minority feel this may be too close for comfort and/or against the spirit of the rules.
3. The IRS has not given guidance specific enough to know for sure.
4. If you were to do this, get audited, and get busted and required to pay back taxes with interest and penalties, you would be the first ever here and a celebrity on this website.
If that happened and you started a gofundme I’d contribute.
You're awesome! I nearly spit out my coffee, laughing as I read this.
Yep, I would be all in on gofundme.
I think you'd get a pretty good defense just by posting every communication you get from the IRS into this forum, and probably even would find there's an experienced tax attorney here waiting in the wings to represent you pro bono.
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ruralavalon
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Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by ruralavalon »

zeldak wrote: Sun May 22, 2022 9:49 am Can the following funds be used as tax loss harvest partners in a taxable account without fear of creating a wash sale?

VTSAX Total Stock Market Index Fund
VLCAX Large Cap Index Fund
VFIAX 500 Index Fund
. . . . .
Those are good choices for tax harvesting partners, I would not be afraid of creating a wash sale using them.

There can be no absolute certainty on this point because the term "substantially identical" has not been defined.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy
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arcticpineapplecorp.
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Re: VTSAX to VLCAX to VFIAX in Taxable??

Post by arcticpineapplecorp. »

zeldak wrote: Sun May 22, 2022 9:49 am Can the following funds be used as tax loss harvest partners in a taxable account without fear of creating a wash sale?

VTSAX Total Stock Market Index Fund
VLCAX Large Cap Index Fund
VFIAX 500 Index Fund
sure but remember to be especially careful (with purchasing replacement shares either through regular contributions and/or reinvestment of dividends) with VFIAX in your 401k/IRA which many people have.
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