Author Topic: Selecting similar stocks for TLH that don't create a wash sale  (Read 3371 times)

not_a_trex

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I'm going to try and take advantage of some losses that I have taken through tax loss harvesting. I'm considering the exchange between these sets of stocks:

VTSAX <-> VLCAX
VTIAX <-> VFWAX

I have a concern about selecting these due to their similar stock selections and performances. Will exchanging these stocks for the other create a wash sale? If they would, are there any stock selections you would recommend that would not create the wash sale?

johnny847

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #1 on: July 03, 2015, 06:36:29 PM »
The IRS has never really clarified what "substantially identical" means. That being said, any funds that track two different indices will probably suffice.

The alternative is to just sit out of the market for 30 days. It's what I decided to do because honestly on average there's not much market gain to be had in 30 days, and I'd rather just avoid the issue of "substantially identical."

forummm

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #2 on: July 03, 2015, 07:03:47 PM »
I would *not* sit out the market for 30 days. The market goes up on average so you're hurting yourself on average if you do that.

I can't give you tax advice, but from what I've read, people haven't had trouble with the IRS if the buy a different index fund even if it has some similar stocks in common.

johnny847

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #3 on: July 03, 2015, 08:33:29 PM »
I would *not* sit out the market for 30 days. The market goes up on average so you're hurting yourself on average if you do that.

I can't give you tax advice, but from what I've read, people haven't had trouble with the IRS if the buy a different index fund even if it has some similar stocks in common.

Before today I was convinced that the market volatility would wash out any gains over a 30 day period. Yes I know the market goes up on average, but that's when you zoom out and look over a multi-year span - I doubted you could actually see this in a 30 day interval.

But I proved myself wrong. I downloaded the historical closing prices of VFINX starting from 1/2/1980 until today. I looked at the percent difference in closing price for day N and day N+31 for all days in the dataset (except for the last 30 days in the set for obvious reasons).

Here's what I found:
Median difference: +1.07%
Average difference: +0.73%

On 31 day intervals where VFINX closed higher:
Median difference: 2.92%
Average difference: 3.52%

On 31 day intervals where VFINX closed lower:
Median difference: -2.56%
Average difference: -3.59%

Conclusions:
1) In more cases than not, you are better off finding a similar fund because you don't want to sit out of the market.
2) The market crashes harder in 31 day intervals than the market gains in 31 day intervals. Notice how the average percent difference when it closed lower 31 days later is greater in magnitude than the median percent difference.
You can also see this in the histogram - there are more bins populated in the left tail than the right tail.


I've attached the histogram of the data. If anybody wants me to pull out more statistics from this data I can give it a shot.

P.S. Unfortunately I have ignored dividends in this analysis. As we all hopefully know, a dividend's issuance causes the price of the security to drop. However, this can only mean that some of those closing prices should be higher if you factor in the fact that you received a dividend, which only makes the conclusion even stronger than you should not sit out of the market.


Thank you forummm for challenging me on this - I wouldn't have done this analysis otherwise.


EDIT: To do this correctly I'd have to compare VFINX price on day N to a that of a correlated fund on day N+31, such as VTSMX. However, I compared VFINX to itself because I wanted a dataset that went back many years.
« Last Edit: July 03, 2015, 08:38:12 PM by johnny847 »

clifp

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #4 on: July 03, 2015, 08:51:47 PM »
I'm going to try and take advantage of some losses that I have taken through tax loss harvesting. I'm considering the exchange between these sets of stocks:

VTSAX <-> VLCAX
VTIAX <-> VFWAX

I have a concern about selecting these due to their similar stock selections and performances. Will exchanging these stocks for the other create a wash sale? If they would, are there any stock selections you would recommend that would not create the wash sale?

I'm almost positive those won't trigger a wash sale.  A Schwab guy told me that swapping a Vanguard 500 S&P for Schwab 500 S&P  wouldn't even trigger a wash sale. Vanguard has 505 holding in their fun Schwab has 502 so they are different.  A former IRS agent told me that he thought that might be pushing things but doubt the IRS would make a big deal about it.

In your case those funds have preformed significantly differently over almost all holding periods.

johnny847

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #5 on: July 03, 2015, 08:59:30 PM »
I'm almost positive those won't trigger a wash sale.  A Schwab guy told me that swapping a Vanguard 500 S&P for Schwab 500 S&P  wouldn't even trigger a wash sale. Vanguard has 505 holding in their fun Schwab has 502 so they are different.  A former IRS agent told me that he thought that might be pushing things but doubt the IRS would make a big deal about it.

In your case those funds have preformed significantly differently over almost all holding periods.

I agree with the IRS agent, that's really pushing it. Assuming that there are 502 companies in overlap (they should, in theory have at least 500 companies in overlap), that would mean 99.4% of the companies in the Vanguard fund are in the Schwab fund. While the IRS has never actually defined "substantially identical," a 99.4% similarity in the holdings, particularly of two funds that track the same index, sounds substantially identical to me.
Sure, the IRS may not make a big deal out of it. But if they decide to audit you, they can pull you in for that and then slam you for bigger problems (if any) on your tax return.

not_a_trex

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #6 on: July 03, 2015, 11:03:50 PM »
It sounds like my trading choices may be questionable and I would like to err on the safe side. Are there recommendations that others use for TLH? I would guess that VTSAX and VTIAX are commonly bought on MMM.

But I proved myself wrong. I downloaded the historical closing prices of VFINX starting from 1/2/1980 until today. I looked at the percent difference in closing price for day N and day N+31 for all days in the dataset (except for the last 30 days in the set for obvious reasons).

Where did you get this data? I'm curious to try and do my own analysis.

johnny847

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #7 on: July 04, 2015, 02:11:23 AM »
It sounds like my trading choices may be questionable and I would like to err on the safe side. Are there recommendations that others use for TLH? I would guess that VTSAX and VTIAX are commonly bought on MMM.

But I proved myself wrong. I downloaded the historical closing prices of VFINX starting from 1/2/1980 until today. I looked at the percent difference in closing price for day N and day N+31 for all days in the dataset (except for the last 30 days in the set for obvious reasons).

Where did you get this data? I'm curious to try and do my own analysis.
I think your trading choices are fine.

I downloaded the data from yahoo finance. Look up any fund you want and then look at historic prices. At the bottom (or was it on the right) you can download the data as a csv file.

clifp

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #8 on: July 04, 2015, 02:15:27 AM »
It sounds like my trading choices may be questionable and I would like to err on the safe side. Are there recommendations that others use for TLH? I would guess that VTSAX and VTIAX are commonly bought on MMM.

But I proved myself wrong. I downloaded the historical closing prices of VFINX starting from 1/2/1980 until today. I looked at the percent difference in closing price for day N and day N+31 for all days in the dataset (except for the last 30 days in the set for obvious reasons).

Where did you get this data? I'm curious to try and do my own analysis.

Johnny was talking about something else.
Your choices are fine. Replacing Vanguard Total Stock Market, with Vanguard large cap is really two different funds, as is a international fund that excludes vs includes US stocks.

forummm

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #9 on: July 04, 2015, 06:13:12 AM »
Unfortunately I have ignored dividends in this analysis.

Glad I challenged you to think differently about this. If you added the dividends, that would boost returns 1 to 6 percentage points depending on the time period (dividends used to be higher 30 years ago) on an annual basis. So the difference between the gains and losses would be more significant than what you present here.

Replacing Vanguard Total Stock Market, with Vanguard large cap is really two different funds, as is a international fund that excludes vs includes US stocks.

VLCAX is not an international fund and has substantial overlap with VFIAX.
https://personal.vanguard.com/us/funds/snapshot?FundId=0307&FundIntExt=INT#tab=2

electriceagle

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #10 on: July 04, 2015, 07:24:48 AM »
VLCAX has 10.1% consumer goods stocks while VTSAX has only 9.7%
VTIAX contains 5888 stocks while VFWAX contains only 2492 stocks

These funds are in no way identical.

not_a_trex

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Re: Selecting similar stocks for TLH that don't create a wash sale
« Reply #11 on: July 04, 2015, 10:19:08 AM »
Given that Vanguard lists these funds as each tracking at least one different index and the IRS has not set the precedent of counting different index tracked funds as "substantially similar" I'm willing to try TLH through the exchanges I listed.

Coincidently, Bogleheads lists these funds as alternatives to not generate wash sales. While I realize that this doesn't mean the IRS can't crack down on this, having other people doing this gives me some confidence that it is safe.

http://www.bogleheads.org/wiki/Wash_sale#Fund_alternatives