How do you know if you are violating a wash sale rule (mutual funds)?

[TempusFugit]

If I wanted to sell shares of VBTLX (at a loss) and purchase shares of VGIT, for example, how do I know whether the overlap is enough to trigger a wash sale rule?  Would Vanguard warn me, or is it entirely up to the individual to figure it out?

[secondcor521]

If I wanted to sell shares of VBTLX (at a loss) and purchase shares of VGIT, for example, how do I know whether the overlap is enough to trigger a wash sale rule?  Would Vanguard warn me, or is it entirely up to the individual to figure it out?

If you're buying or selling the same security, most brokerages including Vanguard will apply the wash sale rule for you.  You'll notice this on your 1099 when numbers start appearing in the Adjustments column and "wash sale" in the comments column and code "W" appearing on there.

Since you're buying and selling different securities, I'm fairly certain that it will be entirely up to you to determine whether the securities involved meet the IRS standard of "substantially identical".  If they do, you'll very likely need to make your own adjustments on your tax return, and remember the adjustments you make for future purchases and sales.

Note that a wash sale is not a violent or dramatic tax situation.  If you have a wash sale, all it means in most cases is that some of the loss is postponed into the future.  You're not going to get arrested or be audited or have extra penalties or interest as the result of creating a wash sale.

[bacchi]

Almost everyone would feel comfortable with VBTLX and VGIT being considered different securities. It's not like it's SPY and VOO, which both track the S&P 500 index.

[MustacheAndaHalf]

Different funds, not "substantially identical"

VBLTX holds long-term bonds from commercial and government issuers.
VGIT holds intermediate-term bonds, only from the U.S. treasury.

[secondcor521]

Almost everyone would feel comfortable with VBTLX and VGIT being considered different securities. It's not like it's SPY and VOO, which both track the S&P 500 index.

I didn't want to express an opinion on that part of it.

Different funds, not "substantially identical"

VBLTX holds long-term bonds from commercial and government issuers.
VGIT holds intermediate-term bonds, only from the U.S. treasury.

Not sure if that's a reply to me, but the term in the law is "substantially identical":

https://www.law.cornell.edu/uscode/text/26/1091

[TempusFugit]

I think I read that there's some definition about what percentage of holdings in a mutual fund overlap (like 70%?). 

[secondcor521]

I think I read that there's some definition about what percentage of holdings in a mutual fund overlap (like 70%?).

Someone may have expressed an opinion, but as far as I know the IRS has never defined the term objectively.

[terran]

There is no precise definition and different people are comfortable with different levels of overlap. I'm comfortable with saying anything that follows the same index can cause a wash sale and anything that follows a different index doesn't even if it follows the same broad market.

[MustacheAndaHalf]

It's not like it's SPY and VOO, which both track the S&P 500 index.

FYI, and for further reading:

... if an investor sells the SPDR S&P 500 ETF (SPY) at a loss, they may immediately turn around and purchase the Vanguard S&P 500 ETF (VOO).

The rationale is that the two S&P 500 ETFs have different fund managers and different expense ratios, may replicate the underlying index using a different methodology, and may have different levels of liquidity in the market. Presently, the IRS does not deem this type of transaction as involving substantially identical securities, and so it is allowed, although this may be subject to change in the future as the practice becomes more widespread.

https://www.investopedia.com/terms/s/substantiallyidenticalsecurity.asp

[bacchi]

It's not like it's SPY and VOO, which both track the S&P 500 index.

FYI, and for further reading:

... if an investor sells the SPDR S&P 500 ETF (SPY) at a loss, they may immediately turn around and purchase the Vanguard S&P 500 ETF (VOO).

The rationale is that the two S&P 500 ETFs have different fund managers and different expense ratios, may replicate the underlying index using a different methodology, and may have different levels of liquidity in the market. Presently, the IRS does not deem this type of transaction as involving substantially identical securities, and so it is allowed, although this may be subject to change in the future as the practice becomes more widespread.

https://www.investopedia.com/terms/s/substantiallyidenticalsecurity.asp

That's a pretty weak rationale for 2 instruments following the same index and holding the exact same securities. The IRS has given very little guidance and the likelihood is extremely low that they would notice but good luck with that. I doubt they'd notice a BND and VBTLX exchange (one is traded intraday with a bid-ask, the other is traded post-market) if they were done with two different brokers.

I'll stick with VTI and VOO.