Tax Loss Harvesting / dump unwanted investment with long term gains

[wooooooooooooo]

Early in my investing, I used VIG (Vanguard dividend appreciation ETF) because it was no transaction fees through my brokerage. Years ago, I moved everything to Vanguard and started using VTSAX, but I didn't want to pay the taxes on the unrealized gains of VIG so I kept it. I'd like to unload it without paying taxes if possible.

In my taxable account; I have:
VIG - $4500 in long term unrealized gains
VTIAX - $6,900 in long term unrealized loss

Is this as easy as:
1. Wait 30 days from my last purchase of VTIAX or any solely international index fund. Disable automatic dividend reinvestment on VTIAX in all accounts.
2. Sell all of my VIG.
3. Sell specific lots of VTIAX with long-term losses totaling $4,500.
4. Refrain from buying more VTIAX or other solely international index funds for 31 days in any account.
5. Re-enable auto dividend investments in VTIAX; and re-balance my overall asset allocation.

Questions:
1. Is it really this easy? What am I missing?
2. I do have a Vanguard target date fund (which includes VTIAX) in my 401K; would contributions to this be considered substantially similar under the wash sale rule?

[secondcor521]

1a.  Pretty much.  I'd reverse the order in step 1 thus:  "Disable automatic dividend reinvestment on VTIAX in all accounts.  Wait 30 days from my last purchase of VTIAX or any solely international index fund."

1b.  You need to make sure you've set your cost basis method for VTIAX to specific ID before selling in step 2.  Also, in order to be able to use specific ID as a cost basis method, it will be necessary that you have not already sold any VTIAX using the average cost basis method (which is the default at Vanguard I think).

Personally I'd wait 31 days in step 1 also.  Finally, apparently spouses can trigger wash sales with each other, so if you're married, don't have your spouse be buying any VTIAX either.

Oh, and the realized gains in VIG (your step 2) can happen any time this tax year.  Realizing gains doesn't come into play with the wash sale rule; the only timing that comes into play with wash sales is purchases and sales of the same or substantially identical shares within the 60-ish day window surrounding the realization of the capital loss (which is step 3 in your plan).  So for example, if you do steps 1, 3, 4, and 5 in that order and in that timing, you could sell the VIG today or in December and you'd end up with the same tax result.  Although, of course, the price of VIG might vary so your $4500 unrealized loss in VIG might go up or down.  Given that, you might want to sell all of your VIG first, so you know what your actual VIG gain will be so you can target that same loss in step 3.

2.  The IRS term is "substantially identical", not "substantially similar".  They've never defined it exactly, but if you're buying a target date fund like Vanguard Target Date 2035 or whatever, I would think that would be very safe and not a problem.

ETA:  We're ignoring short term vs. long term here, but the way capital gains and losses work, all of your 2022 transactions will offset each other eventually on your Schedule D, so for this purpose you can ignore ST vs. LT.

ETA2:  Of course, you'll get a 1099-B from Vanguard reflecting those sales, and you'll have to import or put that on your tax return next spring.

[EliteZags]

1. Wait 30 days from my last purchase of VTIAX or any solely international index fund.

I must be missing something here why is this required

[Ramparts]

In my taxable account; I have:
VIG - $4500 in long term unrealized gains
VTIAX - $6,900 in long term unrealized loss
...
2. Sell all of my VIG.
3. Sell specific lots of VTIAX with long-term losses totaling $4,500.
...

Is there a reason you are looking to avoid having a positive long term capital gains amount for the year? They are taxed at preferential rates at the federal level (maybe even 0% depending on your income). It may be advantageous to you to lock in the gains one year, and then realize the losses in VTIAX in the following year. If you have no other capital gains when you are locking in the losses, they will offset regular income up to 3K/year (which are taxed at higher rates, so your tax savings from harvesting the losses would potentially be greater).

Of course this depends on your specific tax situation, and doesn't account for state taxes. And it depends on my naive understanding of capital gains - hopefully an expert will correct me if I'm wrong!

[MustacheAndaHalf]

1. Wait 30 days from my last purchase of VTIAX or any solely international index fund.

I must be missing something here why is this required

If you sell $1,000 VTIAX at a loss and buy $1,000 VTIAX the next day, that's probably a "wash sale", and you might not benefit from the capital loss on your taxes.  A "wash sale" looks back 30 days and forward 30 days.  So waiting 31 days ensures you don't have to worry about a wash sale, and ensure you can deduct a capital loss.

[secondcor521]

1. Wait 30 days from my last purchase of VTIAX or any solely international index fund.

I must be missing something here why is this required

If you sell $1,000 VTIAX at a loss and buy $1,000 VTIAX the next day, that's probably a "wash sale", and you might not benefit from the capital loss on your taxes.  A "wash sale" looks back 30 days and forward 30 days.  So waiting 31 days ensures you don't have to worry about a wash sale, and ensure you can deduct a capital loss.

I think they might have been asking about the "or any solely international index fund" part.  Waiting for the 31 days after the purchase of VTIAX is clearly required to avoid a wash sale.  "Any solely international index fund" may not be (I would say is probably not) necessary.

But that's just a guess on my part.

[MustacheAndaHalf]

Since the IRS remains vague about the meaning of "substantially identical", each taxpayer needs to form their own view.  I think the common reading is that different brands are different assets.  So IXUS (iShares) and VTIAX (Vanguard) may both track total international, but might avoid the substantially identical label.

Your broker has made a decision on what they will report as a wash sale.  And from what I've seen, they just use "identical".  If the IRS audited a wash sale of mine, I might ask them how I'm expected to know the rule better than my broker.  And if the IRS doesn't have a good answer for that, then maybe "substantially identical" is just "identical" in practice.

[PDXTabs]

Since the IRS remains vague about the meaning of "substantially identical", each taxpayer needs to form their own view.  I think the common reading is that different brands are different assets.  So IXUS (iShares) and VTIAX (Vanguard) may both track total international, but might avoid the substantially identical label.

Your broker has made a decision on what they will report as a wash sale.  And from what I've seen, they just use "identical".  If the IRS audited a wash sale of mine, I might ask them how I'm expected to know the rule better than my broker.  And if the IRS doesn't have a good answer for that, then maybe "substantially identical" is just "identical" in practice.

I, personally, would be reluctant to sell one index fund and then buy another one that tracked the same index. I, personally, think that would be hard to answer questions about under oath in tax court.

However, I don't think that it would be hard to explain how an ETF and a mutual fund are not substantially identical because of the difference in how they trade.

But yes, you need to justify it to yourself and in all seriousness be able to say it with a straight face to your auditor.

[BiggerFishToFI]

If it were me, I’d harvest the loss in VTIAX but keep the VIG. It’s not that bad of a fund.

Then once fire, I would harvest the gain at the 0% tax rate. If your income is low enough (<40k single or 80k joint), you may be able to harvest some now at the 0% rate.