Author Topic: Worried about wash sales Betterment + Vanguard VTSMX  (Read 539 times)

jimmy88

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Worried about wash sales Betterment + Vanguard VTSMX
« on: February 16, 2018, 03:52:01 PM »
Hey guys, I've got a Betterment account with around 100k (40k IRA/60k Taxable), and just opened up a Vanguard account with 3k invested in VTSMX. I'd like to slowly move my money over to Vanguard but I'm now getting worried after reading up on the wash sale rule.

"The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so."

With Betterment's tax-loss harvesting, and the fact that their portfolio uses VTI, which is basically the same thing as VTSMX/VTSAX do I need to worry about wash sales if I plan to continually invest in the newly created Vanguard account? I want to eventually move the IRA from Betterment to Vanguard, and stop investing in the Betterment taxable account (dump everything into VTSMX/VTSAX) but now I'm worried and am thinking I should just stick with Betterment.

Any advice?

L.A.S.

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Re: Worried about wash sales Betterment + Vanguard VTSMX
« Reply #1 on: February 16, 2018, 04:26:54 PM »
Hey guys, I've got a Betterment account with around 100k (40k IRA/60k Taxable), and just opened up a Vanguard account with 3k invested in VTSMX. I'd like to slowly move my money over to Vanguard but I'm now getting worried after reading up on the wash sale rule.

"The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so."

With Betterment's tax-loss harvesting, and the fact that their portfolio uses VTI, which is basically the same thing as VTSMX/VTSAX do I need to worry about wash sales if I plan to continually invest in the newly created Vanguard account? I want to eventually move the IRA from Betterment to Vanguard, and stop investing in the Betterment taxable account (dump everything into VTSMX/VTSAX) but now I'm worried and am thinking I should just stick with Betterment.

Any advice?

Short answer: Yes.


Long answer:

The IRS, to my knowledge, has never defined "substantially identical" but VTI and VTSAX/VTSMK would probably be considered substantially identical under any reasonable test.  The 1099-Bs from Betterment and Vanguard likely would not indicate that a wash sale occurred in this case since they are separate custodians/accounts and different securities.  So you would have to manually determine whether a wash-sale occurred, adjust the stated lost on the Betterment 1099, and keep track of basis adjustment on the replacement securities in Vanguard if you want to do it right.  Quite a headache if you ask me.  Some people just choose to do it wrong and ignore wash sales unless they are reported by the broker on the 1099-B.  But you run the risk of getting caught in an audit and having the IRS disallow a claimed loss and demand tax payments on this disallowed loss.  My guess is the IRS could start cracking down on the type of situation you describe as these robots-advisors get popular. 

Other things to consider is that if you buy the replacement in an IRA, the loss is supposed to be disallowed and the replacement security is not entitled to basis adjustment since it is in a tax deferred account -- the tax loss disappears.  Check IRS Rev. Rul. 2008-5.  https://www.irs.gov/irb/2008-03_IRB#RR-2008-5

Also, if one is married, the married couple's assets can be considered jointly.  So if Husband sells stock and then Wife buys the replacement stock, this could be considered a wash sale by the IRS.

Personally, I wouldn't want a robot buying and selling my stocks.  Perhaps it would be better ditching Betterment and keeping Vanguard.  I don't believe that tax-loss harvesting provides the improvement improvement that Betterment claims. 

SeattleCPA

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Re: Worried about wash sales Betterment + Vanguard VTSMX
« Reply #2 on: February 16, 2018, 04:41:24 PM »
Hey guys, I've got a Betterment account with around 100k (40k IRA/60k Taxable), and just opened up a Vanguard account with 3k invested in VTSMX. I'd like to slowly move my money over to Vanguard but I'm now getting worried after reading up on the wash sale rule.

"The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so."

With Betterment's tax-loss harvesting, and the fact that their portfolio uses VTI, which is basically the same thing as VTSMX/VTSAX do I need to worry about wash sales if I plan to continually invest in the newly created Vanguard account? I want to eventually move the IRA from Betterment to Vanguard, and stop investing in the Betterment taxable account (dump everything into VTSMX/VTSAX) but now I'm worried and am thinking I should just stick with Betterment.

Any advice?

Short answer: Yes.


Long answer:

The IRS, to my knowledge, has never defined "substantially identical" but VTI and VTSAX/VTSMK would probably be considered substantially identical under any reasonable test.  The 1099-Bs from Betterment and Vanguard likely would not indicate that a wash sale occurred in this case since they are separate custodians/accounts and different securities.  So you would have to manually determine whether a wash-sale occurred, adjust the stated lost on the Betterment 1099, and keep track of basis adjustment on the replacement securities in Vanguard if you want to do it right.  Quite a headache if you ask me.  Some people just choose to do it wrong and ignore wash sales unless they are reported by the broker on the 1099-B.  But you run the risk of getting caught in an audit and having the IRS disallow a claimed loss and demand tax payments on this disallowed loss.  My guess is the IRS could start cracking down on the type of situation you describe as these robots-advisors get popular. 

Other things to consider is that if you buy the replacement in an IRA, the loss is supposed to be disallowed and the replacement security is not entitled to basis adjustment since it is in a tax deferred account -- the tax loss disappears.  Check IRS Rev. Rul. 2008-5.  https://www.irs.gov/irb/2008-03_IRB#RR-2008-5

Also, if one is married, the married couple's assets can be considered jointly.  So if Husband sells stock and then Wife buys the replacement stock, this could be considered a wash sale by the IRS.

Personally, I wouldn't want a robot buying and selling my stocks.  Perhaps it would be better ditching Betterment and keeping Vanguard.  I don't believe that tax-loss harvesting provides the improvement improvement that Betterment claims.

Good answer and information... Excellent comments LAS...
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GillyMack

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Re: Worried about wash sales Betterment + Vanguard VTSMX
« Reply #3 on: February 17, 2018, 10:33:25 AM »
Until I read this above^^, I didn't know about wash sales and IRAs. 

Situation - starting drawdown phase, reducing job hours more, trying to keep income low this year (ACA). Have taxable funds in short term bond fund at Vanguard purchased a few years ago when share prices were higher. We have Roths at Vanguard, one in stock index, the other in same short term bond fund (for part of overall porfolio balancing). Want to fund Roths for last year and this year.  It will have to be out of the taxable fund.

I was disappointed in short term bond fund losses lately due to rising interest rates.  I wouldn't normally care but I knew I would have to start drawing down the taxable account.  Was thinking that at least I would get a few hundred dollars of capital losses for this year to offset some interest income. 

But now in light of wash sales, if I move $ from taxable short term bond to Roth IRA holding same fund, it seems like capital loss goes away.  What about moving from taxable short term bond into Roth with stock index fund?  Does capital tax loss survive?

jimmy88

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Re: Worried about wash sales Betterment + Vanguard VTSMX
« Reply #4 on: February 17, 2018, 12:23:07 PM »
Hey guys, I've got a Betterment account with around 100k (40k IRA/60k Taxable), and just opened up a Vanguard account with 3k invested in VTSMX. I'd like to slowly move my money over to Vanguard but I'm now getting worried after reading up on the wash sale rule.

"The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so."

With Betterment's tax-loss harvesting, and the fact that their portfolio uses VTI, which is basically the same thing as VTSMX/VTSAX do I need to worry about wash sales if I plan to continually invest in the newly created Vanguard account? I want to eventually move the IRA from Betterment to Vanguard, and stop investing in the Betterment taxable account (dump everything into VTSMX/VTSAX) but now I'm worried and am thinking I should just stick with Betterment.

Any advice?

Short answer: Yes.


Long answer:

The IRS, to my knowledge, has never defined "substantially identical" but VTI and VTSAX/VTSMK would probably be considered substantially identical under any reasonable test.  The 1099-Bs from Betterment and Vanguard likely would not indicate that a wash sale occurred in this case since they are separate custodians/accounts and different securities.  So you would have to manually determine whether a wash-sale occurred, adjust the stated lost on the Betterment 1099, and keep track of basis adjustment on the replacement securities in Vanguard if you want to do it right.  Quite a headache if you ask me.  Some people just choose to do it wrong and ignore wash sales unless they are reported by the broker on the 1099-B.  But you run the risk of getting caught in an audit and having the IRS disallow a claimed loss and demand tax payments on this disallowed loss.  My guess is the IRS could start cracking down on the type of situation you describe as these robots-advisors get popular. 

Other things to consider is that if you buy the replacement in an IRA, the loss is supposed to be disallowed and the replacement security is not entitled to basis adjustment since it is in a tax deferred account -- the tax loss disappears.  Check IRS Rev. Rul. 2008-5.  https://www.irs.gov/irb/2008-03_IRB#RR-2008-5

Also, if one is married, the married couple's assets can be considered jointly.  So if Husband sells stock and then Wife buys the replacement stock, this could be considered a wash sale by the IRS.

Personally, I wouldn't want a robot buying and selling my stocks.  Perhaps it would be better ditching Betterment and keeping Vanguard.  I don't believe that tax-loss harvesting provides the improvement improvement that Betterment claims.

Thanks for the information LAS - that's very helpful.

I've done quite a bit of reading since posting this on moving from Betterment to Vanguard, and want to pull the trigger.

From what I understand moving my IRA is easy - Betterment will write Vanguard a check and then once the money is in Vanguard I select the funds I want to invest in.

Moving the taxable account is where I become unsure. I can either have Betterment move it in-kind to Vanguard, or I can withdraw the entire 60k, pay capital gains tax (gains at the moment are 23.6%), and then buy whatever I want at Vanguard.

I've read that the in-kind transfer would leave me with Betterment's selection of ETF's in my Vanguard account, and that this could be a pain to unwind/sell-off.

Would I be better off just paying the capital gains to be done with Betterment?

I'm also thinking about allocating the money in these funds vs 100% VTI.

65% VTSAX
25% VTIAX
10% VBTLX

Thank you!


 

MustacheAndaHalf

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Re: Worried about wash sales Betterment + Vanguard VTSMX
« Reply #5 on: February 18, 2018, 11:55:41 PM »
If you owe gains on all of your Betterment holdings, the wash sale rule doesn't apply.  The wash sale rule protects the IRS from giving you tax benefits when you sell something at a loss, then move too quickly into the same asset.

You might have a mix of gains and losses.  To be safe about it, you could sell everything at Betterment and move the cash to Vanguard, then invest in the S&P 500 index fund (VOO).  Since the S&P 500 index lacks small and mid cap stocks, you could argue that it is not substantially identical to VTI/VTSAX that includes both small cap and mid cap stocks.  You can keep your money in the S&P 500 for over 30 days and then buy VTI/VTSAX again to avoid worries about the wash sale rule.

If you want to assess your tax impact more clearly, look for your "cost basis" on Betterment, or maybe your purchase history.  You want to see if anything has a loss right now, and if you've held some funds for less than a year (which has worse tax treatment).