Wash sale rule

Forum|Forum|3 years ago
July 19, 2022
2 replies
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So I sold my Vanguard S&P 500 ETF for a loss a week ago in my taxable (non-retirement) account . My separate retirement account is set to automatically invest a small amount every paycheck into Vanguards S&P 500 mutual fund. Even though it is automatic do I have to exclude the amount purchased within 30 days of the sale because of the wash rule?

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rjs

Employee

The fact that the purchase in your IRA is done automatically doesn't make any difference. A purchase is a purchase. The purchase being made automatically does not avoid the wash sale rule.

But there are two other questions here.

1. Is the S&P 500 mutual fund "substantially identical" to the S&P 500 ETF?

2. Does a purchase in your IRA make the sale in your taxable account a wash sale?

On the first question there is no clear IRS guidance, and experts may disagree. But there's good reason to consider them substantially identical, since they track the same index. If you compared the price movements of the two funds, you would not see any significant difference. Obviously the safe, conservative position is to consider them substantially identical.

For the second question, the rules are clear that purchasing substantially identical securities in your IRA does make the sale in your taxable account a wash sale. So you cannot deduct the loss on the portion of the fund that you sold that was replaced by the shares purchased in your IRA. What's worse is that you get no adjustment in your IRA for the disallowed loss, so you never get to deduct the loss. If the sale and purchase are both made in taxable accounts, the disallowed loss is added to the basis of the replacement shares. That means that when you eventually sell the replacement shares you get the benefit of the original loss. Your gain on the sale is reduced by the amount of the wash sale loss. But when the replacement purchase is in your IRA you never recover the disallowed loss from the wash sale.

In your specific situation, neither the purchase being made automatically, nor the purchase being in your IRA, avoids the wash sale rule. So the question comes down to whether the S&P 500 mutual fund is "substantially identical" to the S&P 500 ETF. The safe position is to consider them substantially identical and exclude that portion of the loss.

For an excellent, very detailed discussion of wash sales, see the following link.

The Wash Sale Rule

NCPERSON1

@rjs @mas1998 - not an expert but one position is identified as a mutual fund and one is identified as an ETF... that in of itself may not be "substaintionally identical". in one case you are buying a basket of securities (mutual fund) and in the other the security you are buying is an ETF (which is technically not the basket of securities)

Last year I sold a mutual fund at a loss (at Vanguard) and then immediately purchased an ETF representing effectively the same basket of securities. In certain situations, Vanguard sells both a ETF version and a mutual fund version. Example: BND and VBLTX. This was in my non-qualified account. Vanguard did NOT report this as a wash-sale.

So if these are two Vanguard securities and one is a mutual fund and one is an ETF, it may not be 'substaintially identical'. What are the two ticker symbols?

Anonymous_

Employee

@NCPERSON1 wrote:
What are the two ticker symbols?

If the ticker symbols are VOO and VFIAX, I would be extremely cautious about taking the position that those two funds as not substantially identical; they hold almost exactly the same number of shares in exactly the same corporations.

The web site for VFIAX even states that the [fund] is "also available as an ETF".

Mike9241

you may want to read this thread

https://www.investopedia.com/ask/answers/09/mutual-fund-etf.asp#:~:text=Mutual%20funds%20have%20more%20complex%20structuring%20than%20ETFs,offer%20a%20wide%20selection%20of%20actively%20managed%20funds.

note that one line in the key takeaways says

Mutual funds are actively managed, and ETFs are passively managed investment options.

while lower in the thread

In 2008, the Securities and Exchange Commission (SEC) streamlined its approval process for ETFs, which for the first time allowed for actively managed ETFs.

how they are managed is something that the IRS could take into consideration in determining whether the two securities are substantially identical.