Wash Sale Substantially Identical - Bogleheads.org (2024)

Hi,

I hold Vanguard Total Stock Index VTI in taxable and have an option for State Street U.S. Total Market Index Securities Lending Series Fund Class I in my 401k plan. My question is would they be considered substantially identical for tax purposes or not given they track a different index and are managed by a different company?

State Street U.S. Total Market Index Securities Lending Series Fund Class I: Dow Jones U.S. Total Stock Market Index
Vanguard Total Stock Market ETF: CRSP US Total Market Index

Thanks for your help!

Investopedia says you're on the right track- https://www.investopedia.com/articles/i ... g-etfs.asp

"You can also use ETFs to replace mutual funds or other ETFs as long as they’re not substantially identical. If you’re unsure whether a particular ETF is too similar to another, you can look to its index for guidance. If the ETF you’re selling and the ETF you’re thinking of buying both tracks the same index, that’s an indication that the IRS may deem the securities too similar.

By inference, 2 ETFs, each tracking a different index, are likely not substantially identical.

The IRS, AFAIK, has not officially ruled that ETFs that track the same index are substantially identical, so theoretically you could use SPY & VOO as TLH partners, if you felt lucky...

They don't track the same index and if you really dug into them, you would find hundreds of other differences.
And mutual funds or ETFs are not indices. They use all kinds of varying active and passive techniques to "seek" to match before expenses the performance of a given index. With absolutely no guarantee that they will successfully do so.

In a nutshell that's why no-one on the forum or elsewhere has ever documented the denial of a tax loss by selling a mutual fund or ETF at a loss and immediately replacing it with a different ETF or fund.

OP

Just to ensure there is zero confusion: Wash Sales rules are only for losses. There are no re-buying rules for gains. You can sell VTI for a gain and rebuy the ETF 2 minutes later.

Rocky Mtn Man wrote: ↑Tue Nov 28, 2023 6:28 amOP

Just to ensure there is zero confusion: Wash Sales rules are only for losses. There are no re-buying rules for gains. You can sell VTI for a gain and rebuy the ETF 2 minutes later.

Thanks, yes there is no confusion about that. I am just trying to setup things such that I do not run into issues later. I did some changes to the portfolio earlier this year (moving bonds from taxable to tax deferred) where I temporarily held different funds and changed them after 30 days to avoid wash sales and I found doing these transactions stressful as a mistake can so easily happen. So just trying to avoid this in the future.

If you can find an etf that tracks the same index as your fund, you can use this ETF overlap tool to compare:
https://www.etfrc.com/funds/overlap.php

A weighted overlap of 99%+ would be cause for concern. Note that substantially identical allows for small differences.

Absent a suitable ETF, different indexes would be good enough to call it not substantially identical.

chr wrote: ↑Mon Nov 27, 2023 9:32 pmHi,

I hold Vanguard Total Stock Index VTI in taxable and have an option for State Street U.S. Total Market Index Securities Lending Series Fund Class I in my 401k plan. My question is would they be considered substantially identical for tax purposes or not given they track a different index and are managed by a different company?

State Street U.S. Total Market Index Securities Lending Series Fund Class I: Dow Jones U.S. Total Stock Market Index
Vanguard Total Stock Market ETF: CRSP US Total Market Index

Thanks for your help!

Nobody knows for sure, because the IRS has not told us what particular facts will decide the issue.

My guess it that those funds would probably not be considered substantially identical for tax purposes because they track a different index and are managed by a different company.

"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy

ruralavalon wrote: ↑Wed Nov 29, 2023 4:05 pmMy guess it that those funds would probably not be considered substantially identical for tax purposes because they track a different index and are managed by a different company.

That they track a different index is suggestive but not definitive.

That they are managed by a different company means absolutely nothing.

For context, this used to be my day job. I used to have lots of fat presentations on my desk from former IRS people who enforced the rules. Whole freaking multi-day national conferences on this subject. sigh.

alex_686 wrote: ↑Wed Nov 29, 2023 4:12 pm

ruralavalon wrote: ↑Wed Nov 29, 2023 4:05 pmMy guess it that those funds would probably not be considered substantially identical for tax purposes because they track a different index and are managed by a different company.

That they track a different index is suggestive but not definitive.

That they are managed by a different company means absolutely nothing.

For context, this used to be my day job. I used to have lots of fat presentations on my desk from former IRS people who enforced the rules. Whole freaking multi-day national conferences on this subject. sigh.

What are the suggestive factors you are aware of, in addition to the index used?

"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link: Bogleheads® investment philosophy

alex_686 wrote: ↑Wed Nov 29, 2023 4:12 pmWhole freaking multi-day national conferences on this subject. sigh.

That's interesting. If there were conferences, what did the conferences teach?

Link to Asking Portfolio Questions

ruralavalon wrote: ↑Wed Nov 29, 2023 4:25 pmWhat are the suggestive factors you are aware of, in addition to the index used?

Technically the index doesn't matter. What actually matters is the actual underling securities are between the two funds.

There are some fun cases from the 90s where people created custom indexes. For example, they sold the S&P 500 and bought Alex's 501. Technically different indexes from different providers but it was a abusive transaction. The IRS had me root around for how similar a sub-set of our bond portfolio was like Credit Default Swap Indexes that we were trading.

We used the 80% overlap rule which is common for mutual funds. This would probably be overkill for a retail investor - unless you hired a investment banker and fancy CPAs to create custom indexes....

So, as such, different indexes are suggestive that the actual underlying holdings are different.

retiredjg wrote: ↑Wed Nov 29, 2023 4:28 pm

alex_686 wrote: ↑Wed Nov 29, 2023 4:12 pmWhole freaking multi-day national conferences on this subject. sigh.

That's interesting. If there were conferences, what did the conferences teach?

Well, the 80% rule. I mean, how technical do you want to get? Because I can and can't get technical. It was a lot of "consider this" and "document that".

I mean, for a generic plain vanilla mutual fund you are going to have a massive number of wash sales. On the other hand it really doesn't matter. The mutual funds are not trying to game the system. The portfolio managers have no clue nor care about the tax implications of their trading. The impact is low.

Seriously, I have a hard time justifying the amount of energy spent on this, for mutual funds, as a social benefit to society.

alex_686 wrote: ↑Wed Nov 29, 2023 4:39 pm

retiredjg wrote: ↑Wed Nov 29, 2023 4:28 pm

alex_686 wrote: ↑Wed Nov 29, 2023 4:12 pmWhole freaking multi-day national conferences on this subject. sigh.

That's interesting. If there were conferences, what did the conferences teach?

Well, the 80% rule. I mean, how technical do you want to get? Because I can and can't get technical. It was a lot of "consider this" and "document that".

I mean, for a generic plain vanilla mutual fund you are going to have a massive number of wash sales. On the other hand it really doesn't matter. The mutual funds are not trying to game the system. The portfolio managers have no clue nor care about the tax implications of their trading. The impact is low.

Seriously, I have a hard time justifying the amount of energy spent on this, for mutual funds, as a social benefit to society.

I'm having a hard time understanding what you are explaining in relation to wash sales within a mutual fund. What does the 80% rule have to do with your job working within a mutual fund? Isn't the mutual fund buying and selling individual securities? So what is the 80% when a mutual fund trades between a stock like Microsoft to Apple?

Nate79 wrote: ↑Wed Nov 29, 2023 5:50 pmI'm having a hard time understanding what you are explaining in relation to wash sales within a mutual fund. What does the 80% rule have to do with your job working within a mutual fund? Isn't the mutual fund buying and selling individual securities? So what is the 80% when a mutual fund trades between a stock like Microsoft to Apple?

What if I sell Apple along with a basket of securities that forms the S&P 500 and then buy a S&P 500 future. Is there any real economic risk between the old portfolio and the new one? No. That could be a tax issue. What if I sold a basket that was only 50% of the S&P 500 and bought futures? Probably not. Now where is the magic line? Maybe 80%.

And this happens all of the time. Every day money flows into a mutual fund or out. Shareholders buying and selling. Dividends and coupons coming in. etc.

Maybe there was a outflow at year end so the portfolio manager sells a portion of the portfolio. The next day there is a surprise inflow. The fastest and cheapest way to redeploy the money in the short term are futures. Happens all the time.

I am going to broaden this to included all "constructive sales". These are real transactions that generate reportable transactions that may or not represent real economic changes.

You have a target holding of Apple as a percentage of the portfolio. So if funds flow out you sell Apple. Then funds flow in so you buy Apple. So lots of wash sales even if you are really not doing anything.

What if sell Apple but buy options? Or buy convertible bonds?

What if you sell a Apple bond but buy a slightly different bond. What about if you do Treasury futures and a Credit Default Swap on Apple?

I could go on and on.

alex_686 wrote: ↑Wed Nov 29, 2023 4:39 pm

retiredjg wrote: ↑Wed Nov 29, 2023 4:28 pm

alex_686 wrote: ↑Wed Nov 29, 2023 4:12 pmWhole freaking multi-day national conferences on this subject. sigh.

That's interesting. If there were conferences, what did the conferences teach?

Well, the 80% rule. I mean, how technical do you want to get? Because I can and can't get technical. It was a lot of "consider this" and "document that".

I mean, for a generic plain vanilla mutual fund you are going to have a massive number of wash sales. On the other hand it really doesn't matter. The mutual funds are not trying to game the system. The portfolio managers have no clue nor care about the tax implications of their trading. The impact is low.

Seriously, I have a hard time justifying the amount of energy spent on this, for mutual funds, as a social benefit to society.

Are you saying the IRS considers 2 mutual funds or ETFs substantially identical if there is >80% overlap of underlying stocks? That seems like a low bar- to me, 20% different is far from "substantially identical."
On BH, VTI & VOO are commonly used as TLH partners & I believe those ETFs overlap by more than 80%.

Second question- Your experience is in the corporate world, it seems. Any idea how often the IRS disallows a realized loss on the 1040 of an individual taxpayer who is buying & selling MFs & ETFs that the IRS deems "substantially identical?"

Navillus1968 wrote: ↑Wed Nov 29, 2023 6:37 pmAre you saying the IRS considers 2 mutual funds or ETFs substantially identical if there is >80% overlap of underlying stocks? That seems like a low bar- to me, 20% different is far from "substantially identical."
On BH, VTI & VOO are commonly used as TLH partners & I believe those ETFs overlap by more than 80%.

Second question- Your experience is in the corporate world, it seems. Any idea how often the IRS disallows a realized loss on the 1040 of an individual taxpayer who is buying & selling MFs & ETFs that the IRS deems "substantially identical?"

On the second question, the tax rules are exactly the same regardless of the size. And it was in the investment world, not corporate world.

On the first question, What would your standard be? I would suggest a standard where sophisticated people (read rich and wealthy) were able to pay lower taxes because they can throw more money at fancy accountants. I would purpose that taxes should be associated with real economic activity and with fancy paperwork.

As for BH using VTI and VOO as pairs - do you want to be popular or do you want to be right? I am not saying that VTI and VOO are not pairs. I am saying that it is a popular response is thin reasoning. If a auditor ever asks why you did something I doubt that they will accept that it is popular on BH as a good response.

If you look at the wash sale cases involving bonds, the bonds that were determined to be substantially identical were very close to each other. And bonds determined to not be substantially identical were also close to each other in terms of economic risk. Certainly much closer than an 80% overlap would imply.

I have seen the phrase “substantially similar” used in the tax code. 80% overlap would seem more appropriate for that level of similarity, rather than “substantially identical”, where an overlap of 98%+ seems more in keeping.

There was a recent report on Bogleheads of someone who was undergoing a deep-dive audit and the auditor asked about a potential wash sale. The auditor was satisfied with the explanation that the two funds followed different indexes and differed by hundreds of holdings.