Author Topic: SVSPX and VLACX - substantially identical?  (Read 1324 times)

shanaling

  • 5 O'Clock Shadow
  • *
  • Posts: 34
SVSPX and VLACX - substantially identical?
« on: August 25, 2015, 11:04:33 PM »
Would these two funds be considered substantially identical for the purpose of tax loss harvesting?

I have SVSPX in my employer's retirement plan, which I contribute into twice a month. SVSPX follows the S&P 500 index.

I currently hold VTSMX in my taxable account and am considering realizing the recent loss and buying VLACX.
« Last Edit: August 25, 2015, 11:24:22 PM by shanaling »

Cathy

  • Handlebar Stache
  • *****
  • Posts: 1046
Re: SVSPX and VLACX - substantially identical?
« Reply #1 on: August 26, 2015, 12:11:15 AM »
No one can tell you in advance whether your funds are "substantially identical stock or securities" within the meaning of 26 USC 1091.

In most areas of federal law, if you are interested in embarking on a questionable course of conduct but you are not sure whether the proposed conduct is lawful, your remedy is to commence an action for a declaratory judgment against all interested parties. 28 USC 2201(a). Prevailing in such an action results in "receiving a court's imprimatur to engage freely in what otherwise might be characterized as dubious behavior". Penguin Books v. Walsh, 929 F2d 69 (2nd Cir 1991). An unfavourable decision can be appealed. 28 USC 1291. Further review can be sought in the Supreme Court of the United States by way of the statutory writ of certiorari. 28 USC 1254(1).

Each step in this process results in the creation of written decisions, freely available to the public, which provide insight into the meaning and application of the law, and often act as precedent for future cases. This is all achieved without the plaintiffs having to engage in the questionable conduct before its legality is conclusively determined. However, this procedure generally does not apply to tax law because the declaratory judgment statute on its face excludes its application "with respect to Federal taxes", except for some situations not applicable here. 28 USC 2201(a).

The IRS has developed a system of private letter rulings for obtaining advance tax advice, but this system has some major differences from the declaratory judgment system. For starters, the IRS has "broad discretion ... to revoke a ruling retroactively" to the detriment of the taxpayer who obtained and relied on it. Christy & Swan v. Commissioner, TC Memo 2011-62, p 8. The decision of the IRS to retroactively change a private letter ruling can only be reviewed if the IRS "abused the discretion vested in [it]". Automobile Club of Michigan v. Commissioner, 353 US 180, 184 (1957). Moreover, letter rulings are purportedly not precedential and "[a] taxpayer may not rely on an advance ruling issued to another taxpayer". 26 CFR 601.201(l)(1). Even more emphatically, "a written determination may not be used or cited as precedent". 26 USC 6110(k)(3).

You can solicit forum opinions on whether those funds are "substantially identical stock or securities" but the answers are unlikely to be of use to you. All you can do is take tax positions that you feel comfortable defending in a court of law, if challenged.
« Last Edit: August 26, 2015, 12:27:57 AM by Cathy »

brooklynguy

  • Handlebar Stache
  • *****
  • Posts: 2200
  • Age: 38
Re: SVSPX and VLACX - substantially identical?
« Reply #2 on: August 26, 2015, 02:12:05 PM »
For what it's worth, the following Kitces article on the "substantially identical" issue as it pertains to mutual funds (which is probably the most conservative analysis of the issue I've come across) may be helpful in determining your own comfort level:

https://www.kitces.com/blog/the-wash-sale-problem-when-tax-loss-harvesting-almost-substantially-identical-mutual-funds-and-etfs/