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Financial Planning / Tax Strategies
|Subject: Re: Wash sale: "Substantially Identical&quo||Date: 2/26/1998 10:36 PM|
|Author: KATinChicagoland||Number: 2254 of 121061|
<<Okay-- as I understand it, it's a "wash sale" if I sell a security, and buy a "substantially identical" security within 30 days. My question is about the meaning of "substantially identical".
Suppose I just took a big loss on my shares of the Vanguard S&P 500 Index Fund (it could happen, if I buy at just the wrong time...) I want to stay invested, but realize the loss. So I sell all my shares of the Vanguard S&P 500 Index Fund, and I reinvest right away in the Schwab S&P 500 Index Fund. Is that a wash sale? The two mutual funds are invested the same way, and perform about the same, but are run by different companies.>>
Interesting question; one we ponder from time to time. In a strict reading of the Internal Revenue Code and regulations, this would not be a wash sale. But the IRS has sometimes succeeded in applying the wash sale rule (or perhaps it would be more accurate to say a "common law" wash sale rule) in situations where it is clear that the Code and regulations do not apply. For example, in the Horne case, a broker was denied a loss deduction when he sold a stock exchange membership at a loss and bought another one. The wash sale rule couldn't possibly apply because he hadn't sold "stock or securities," but the IRS won anyway.
So, if you want to take this maneuver, you pays your nickel and you takes your chances. I'd say this is fairly low-risk (in part because of the Cottage Savings case), but not no-risk. You'd be safer (virtually bullet-proof) if you chose instead to "stay invested" by holding a broad large cap fund that was likely to perform similarly to the S&P but was not designed to mimic it exactly. Less tax risk but more market risk, perhaps. Your choice!
KAT in Chicagoland
Tax Guide for Investors
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