Could the sale of a brokerage CD be subject to wash sale rules?

[water2357]

Could the sale of CDs in a brokerage account be subject to wash sale rules?

For example, if you sold a low interest paying brokerage CD at a loss would you need to wait 30 days after the sale before you could purchase another higher interest paying brokerage CD in any of your taxable brokerage accounts or your traditional or Roth IRA accounts?

If true, are there any guidelines on what type of CD would be considered substantially similar that could not be purchased in the 30 days, e.g. issued by the same bank, issued by any bank, for the same term, has the same CUSIP, etc.

And again if wash sale rules apply, then would the rules mean that if you had purchased any brokerage CD within 30 days prior to the sale of another brokerage CD, that would also mean you couldn't take the loss on the brokerage CD that was sold?

And I've never heard of any wash sale rules applying to early redemption/withdrawal from a CD acquired directly from a bank, that has its own withdrawal penalties and interest penalties that are not at all under any wash sale rules, correct?

Thanks for any clarification on how to handle tax reporting of brokerage CD sales. I'm assuming that when a brokerage CD matures, there is no loss, so no impact on buying additional brokerage CDs, correct?

[Northern Flicker]

If two different CDs are issued by the same bank at the same rate and terms, I could see a case for them being considered substantially identical. But if the interest rates are different, what would be the case for them being substantially identical?

If you buy a CD on the secondary market at a price that is above par, you would realize a capital loss when it matures or is called at par.

[water2357]

I've been doing some searching and so far haven't been able to find much on selling brokerage CDs and wash sale rules. I'd also think that for a wash sale it would have to be basically the same CD or exactly the same interest rate, time to maturity, etc, but the IRS mentions "similar" and I can't find a definition of "similar" for brokerage CDs.

Thanks for pointing out that a purchase on the secondary market could lead to a loss at maturity.

So, if anyone has dealt with selling brokerage CDs, purchasing additional CDs and the tax reporting, I'd greatly appreciate any additional insight.

[Northern Flicker]

Where does the IRS mention "similar"? I've always seen "substantially identical".

[water2357]

Sorry if I did not use the actual IRS language, I may have gotten "similar" from one of the articles I was searching. Thank you for providing the IRS language.

[sperry8]

I would say the answer is no. The new CD would not be substantially similar to the old one. So I don't see how it could be considered such. Further I understand the wash sale rule to apply to securities. I don't classify a CD as a security.

[typical.investor]

I would say the answer is no. The new CD would not be substantially similar to the old one. So I don't see how it could be considered such. Further I understand the wash sale rule to apply to securities. I don't classify a CD as a security.

Really? I'll take a different view and say yes. Others agree.

Bonds are considered securities, for tax purposes, and therefore can be subject to the wash sale rules.

Reg Sec 1.148-4(b)(2)(ii) states that “Generally, bonds are substantially identical if the stated interest rate, maturity, and payment dates are the same.”

See https://www.optionstaxguy.com/substanti ... onds-v-opt

Wow, reading a 1939 decision there where it a muni sale was found substantially identical is interesting. Despite potential credit differences in the bonds the yield was too similar. I think there was even a duration difference of like 1 or 2 years but it was noted that is less substantial on a longer bond that a shorter one.

Other info says ...

Investors can avoid a wash sale on bonds by ensuring that the bonds have different issuers or that there are differences in maturity and interest rates.

[water2357]

I think I finally found about the best answer for "substantially identical" security, although clearly things like options could lead to a wash sale as well.

Brokers are required to report wash sale information to the IRS only for sales and purchases of securities with the same CUSIP number and all securities have a CUSIP number.

So, e.g. each Vanguard mutual fund has its own unique CUSIP number so if you buy and sell that CUSIP number security and it would be considered a wash sale, it gets reported to the IRS.

Likewise each CD issued has its own CUSIP number, so I think to violate wash sale rules you would have to buy and sell that exact CUSIP number CD on the original or secondary market to potentially have a wash sale. Likewise with bonds, stocks and other securities.

If it's got a CUSIP number and you bought and sold it to incur a wash sale that is how the IRS is telling brokers what to report on.

[Northern Flicker]

I would say the answer is no. The new CD would not be substantially similar to the old one. So I don't see how it could be considered such. Further I understand the wash sale rule to apply to securities. I don't classify a CD as a security.

A broker CD is a registered security. It has a cusip. Identical and similar are not synonyms.

[Northern Flicker]

I think I finally found about the best answer for "substantially identical" security, although clearly things like options could lead to a wash sale as well.

Brokers are required to report wash sale information to the IRS only for sales and purchases of securities with the same CUSIP number and all securities have a CUSIP number.

It is not the best answer. The IRS could consider securities with different CUSIPs as substantially identical even if the broker does not report it as a wash sale. Two bonds or two broker CDs with the identical terms and same issuer would be quite iffy in a audit.

[typical.investor]

Likewise each CD issued has its own CUSIP number, so I think to violate wash sale rules you would have to buy and sell that exact CUSIP number CD on the original or secondary market to potentially have a wash sale. Likewise with bonds, stocks and other securities.

If it's got a CUSIP number and you bought and sold it to incur a wash sale that is how the IRS is telling brokers what to report on.

So 922908363 and 464287200 are different?

One is VANGUARD S&P 500 ETF and the other ISHARES S&P 500 ETF.

I understand you want this to be clear and easily understandable but, we are talking tax code and maybe that's dreaming.

[sperry8]

I would say the answer is no. The new CD would not be substantially similar to the old one. So I don't see how it could be considered such. Further I understand the wash sale rule to apply to securities. I don't classify a CD as a security.

A broker CD is a registered security. It has a cusip. Identical and similar are not synonyms.

Interesting. I guess I'm used to bank CDs and not brokered ones. Would bank CDs be considered securities as well? If so, I'm surprised.

[Northern Flicker]

I would say the answer is no. The new CD would not be substantially similar to the old one. So I don't see how it could be considered such. Further I understand the wash sale rule to apply to securities. I don't classify a CD as a security.

A broker CD is a registered security. It has a cusip. Identical and similar are not synonyms.

Interesting. I guess I'm used to bank CDs and not brokered ones. Would bank CDs be considered securities as well? If so, I'm surprised.

I don't think a Federally insured deposit account would be considered a security. But something does not have to be a registered security to be considered a security by the SEC. It would be in interesting corner case if one sold a broker CD that had been issued by bank X and then turned around and invested in a direct CD at bank X with terms identical to the remaining terms of the brokered CD. Also an interesting question would be whether brokered CDs issued by two different banks but otherwise with identical terms would be considered substantially identical given the FDIC insurance.

[typical.investor]

I would say the answer is no. The new CD would not be substantially similar to the old one. So I don't see how it could be considered such. Further I understand the wash sale rule to apply to securities. I don't classify a CD as a security.

A broker CD is a registered security. It has a cusip. Identical and similar are not synonyms.

Interesting. I guess I'm used to bank CDs and not brokered ones. Would bank CDs be considered securities as well? If so, I'm surprised.

I don't think a Federally insured deposit account would be considered a security. But something does not have to be a registered security to be considered a security by the SEC. It would be in interesting corner case if one sold a broker CD that had been issued by bank X and then turned around and invested in a direct CD at bank X with terms identical to the remaining terms of the brokered CD. Also an interesting question would be whether brokered CDs issued by two different banks but otherwise with identical terms would be considered substantially identical given the FDIC insurance.

There is an interesting case from 1939. Who knows if it applies today but they ruled a wash sale for bonds that only changed the yield one-twentieth of one percent.

That was despite the fact that one of the banks involved in issuing the bonds was ruled different than the another due to differences in the collateral (mortgages on farms). Also, a 16 year maturity changed by 4-10 months and a 23 year maturity changed by 2.5 years.

Who knows about today ...

https://www.optionstaxguy.com/_files/ug ... e45b94.pdf
https://www.optionstaxguy.com/substanti ... onds-v-opt

[water2357]

As I stated CUSIP was "about the best" maybe I should have said "purest" definition of substantially identical and also stated that there could and are obviously going to be other considerations and gave one example of options. Thank you all for pointing out additional considerations in defining "substantially identical".

CUSIP number alone is obviously not fool proof. However CUSIP does appear to be the basis that the IRS requires for reporting wash sales to the IRS. And no one mentioned the brokerage reporting requirements. Here is a url from Schwab on wash sales, see Q 2 and Q 4 for comments on CUSIP.

https://www.schwab.com/learn/story/primer-on-wash-sales

Also, my search did not produce any definitive references to brokerage CDs and wash sale rules, but when I saw the reference to CUSIP it then seemed obvious that brokered CDs would definitely be subject to wash sale rules, they all have CUSIP numbers that could be used for IRS reporting.

My take away is that if you are selling and then repurchasing a security with the same CUSIP number within the wash sale time frame at a specific brokerage, it will be reported to the IRS. Beyond that if you sell and repurchase a security with the same CUSIP number at any brokerage within the wash sale time frame you need to report the wash sale regardless. And beyond that you need to look further for anything else that the IRS might consider as "substantially identical". And of course be aware of the full 61 day window and all other details in the IRS regs, etc.

If anyone has additional information on what the IRS considers "substantially identical", please add.

[Northern Flicker]

The current IRS docs mention different share classes of the same investment as an example of substantially identical but not fully identical investments. Thus, selling say VTI and buying VTSAX clearly would be a wash sale. They do not have the same cusip.

Having the same cusip is a sufficient condition for a purchase to be a wash sale. It is not a necessary condition.