Tax Advice // Selling VTSMX to buy VTSAX

[FrugalRubles]

Hello All,
I have been funding a brokerage account over at OptionsHouse. I am holding a position in VTSMX that is down approximately $6k since initial funding, along with a position in AAPL down almost $3k.

I would like to transfer all (or at least the full VTSMX position) over to Vanguard, where I have recently opened a Roth IRA and brokerage account. I would like to transition the full VTSMX holding over to VTSAX and reduce my expense ratio. I would be open to selling the AAPL shares as well, but would like to figure out the best way to deduct the losses.

Can someone provide some guidance on the best way to do this? I am green when it comes to tax loss harvesting and the like.

Thanks in advance.

[johnny847]

There is absolutely no need to sell VTSMX for VTSAX. Vanguard will automatically upgrade your VTSMX to VTSAX once you reach 10k (there is a lag, so if you want you can trigger this conversion automatically). This is NOT a taxable event.

Do not sell your VTSMX shares!

[FrugalRubles]

There is absolutely no need to sell VTSMX for VTSAX. Vanguard will automatically upgrade your VTSMX to VTSAX once you reach 10k (there is a lag, so if you want you can trigger this conversion automatically). This is NOT a taxable event.

Do not sell your VTSMX shares!

I don't currently own the shares @ Vanguard, I own them in a separate brokerage account. What would you recommend?

[Financial.Velociraptor]

There is a thing called an ACAT transfer that lets you transfer shares from one brokerage to another.  There is some administrative lag time involved and you have to make a declaration of your tax basis.  Ask Vanguard customer service what their ACAT policy/process is and follow through.  You can get your shares to Vanguard without incurring commissions or a tax event.

I did this when moving from Scottrade to Interactive Brokers and it was more or less seamless.

[FrugalRubles]

There is a thing called an ACAT transfer that lets you transfer shares from one brokerage to another.  There is some administrative lag time involved and you have to make a declaration of your tax basis.  Ask Vanguard customer service what their ACAT policy/process is and follow through.  You can get your shares to Vanguard without incurring commissions or a tax event.

I did this when moving from Scottrade to Interactive Brokers and it was more or less seamless.

Excellent, that is very helpful. I have enjoyed reading other posts by you as well FV (great name as well) :)

[FrugalRubles]

Just read up on the ACAT transfer, looks like a $75 fee to handle. Is this certainly the most cost effective way to handle?

[johnny847]

Just read up on the ACAT transfer, looks like a $75 fee to handle. Is this certainly the most cost effective way to handle?

How much would you pay in taxes if you sold? (As in, how much in unrealized gains do you have? Are these gains long or short term? And what tax bracket would you be in if you sold?)

[FrugalRubles]

Nothing, purchased this year, only have a loss.

[johnny847]

Nothing, purchased this year, only have a loss.

Oh that makes the decision easy then. Just sell everything*, harvest the loss, and buy in Vanguard**.

*If you do not sell everything then you may incur a wash sale that will reduce your deductible losses. I assume this point is moot because you would be selling everything.

**To claim the loss on your taxes you must not buy a "substantially identical" security in the next 30 days in any of your accounts. Neither the IRS nor Congress has clarified what "substantially identical" actually means but many people take it to mean that any mutual funds that track different indices are not substantially identical.
So you can either sit out of the market for 30 days, or buy a similar fund that tracks a different index. Such as VFIAX which tracks the S&P 500 index. This is a pretty good approximation to VTSAX. If you want to you can also buy VEXMX (that's the investor share class ticker) which tracks the S&P 500 completion index. When you hold VFIAX and VEXMX in an approximately 4:1 ratio, you will get VTSAX's performance within a very small margin of error.
This whole VEXMX business is completely optional, VFIAX will do just fine.

[FrugalRubles]

Interesting, i planned on selling all. I did just buy for a roth ira, but it seems like this may be a good approximation. I will review tomorrow, may have some follow up questions. Thanks!

[johnny847]

Interesting, i planned on selling all. I did just buy for a roth ira, but it seems like this may be a good approximation. I will review tomorrow, may have some follow up questions. Thanks!

Oh oops. So I left out some information because I wanted to simplify...

But the full rule is buying a substantially identical security in the 30 days before or after the sale results in a wash. So the purchase you made in the Roth (if it was of VTSAX or VTSMX) will wash some of your losses if you were to sell VTSMX in your taxable. And actually this is the worst type of wash sale.
When you have a wash sale, what you're really doing is adding the disallowed loss to the basis of the shares that incurred the wash. If this happens in a taxable account what that practically means is you just defer your capital loss for later.  But if those shares are in an IRA or 401k/403b/457b*, then you're not allowed to add the disallowed loss to the basis of your IRA or 401k/403b/457b. That loss is disallowed forever!

*Technically the IRS has only ruled on purchases in an IRA washing sales in a taxable, but many people assume that this ruling extends to 401k/403b/457b's.