Author Topic: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF  (Read 2844 times)

Tabaxus

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Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« on: July 05, 2015, 09:49:29 PM »
So I'm thinking about putting my taxable account at Betterment, largely to take advantage of the automated tax loss harvesting.

Betterment uses a lot of Vanguard ETFs, including TSM.

His/Her IRAs and 401(k) at Vanguard, HSA at a custodian that has access to Vanguard funds.  401(k) is in VBTIX, VTSNC, and VITSX mutual funds, IRAs and HSA are in VTSMX.

As long as I stay in mutual funds at Vanguard, am I at risk of triggering a wash sale because the mutual funds are substantially identical to the ETFs?

Edit:  Moved this here from the investing forum.

johnny847

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #1 on: July 05, 2015, 10:06:24 PM »
The IRS has never clarified what "substantially identical" actually means.

One could try to argue that an ETF is different from the MF. However, that is an incredibly hard argument to make when in fact in the case of Vanguard, the ETFs are structured as another share class of a mutual fund.


This is why it is hard to use Betterment when you have multiple accounts - you cannot coordinate the TLH.

Tabaxus

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #2 on: July 06, 2015, 06:09:40 AM »
The IRS has never clarified what "substantially identical" actually means.

One could try to argue that an ETF is different from the MF. However, that is an incredibly hard argument to make when in fact in the case of Vanguard, the ETFs are structured as another share class of a mutual fund.


This is why it is hard to use Betterment when you have multiple accounts - you cannot coordinate the TLH.

I didn't realize the Vanguard ETFs were structured as a share of the relevant mutual fund.  Oy.

I'd think that this almost completely undermines the ability of anyone with a 401(k) to use Betterment.

johnny847

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #3 on: July 06, 2015, 07:34:34 AM »
The IRS has never clarified what "substantially identical" actually means.

One could try to argue that an ETF is different from the MF. However, that is an incredibly hard argument to make when in fact in the case of Vanguard, the ETFs are structured as another share class of a mutual fund.


This is why it is hard to use Betterment when you have multiple accounts - you cannot coordinate the TLH.

I didn't realize the Vanguard ETFs were structured as a share of the relevant mutual fund.  Oy.

I'd think that this almost completely undermines the ability of anyone with a 401(k) to use Betterment.

Even if it weren't a share of the corresponding mutual fund I'm pretty sure you'd still lose. There are a fair number of people, myself included, that believe that two funds securities tracking the same index are substantially identical. It's just an even harder argument in the case of Vanguard's ETFs and MFs

EDIT:
And yes, it's virtually impossible to use Betterment if you have any investments elsewhere that track the same indices. And it seems you are aware of this, but for the sake of everybody else reading this thread:
With respect to tax loss harvesting you get the worst of both worlds in IRAs and 401k/403b/457b's. You cannot TLH in a retirement account, but any purchases in a retirement account can cause a wash sale of a security you were TLHing in a taxable account.
« Last Edit: July 06, 2015, 08:00:31 AM by johnny847 »

milesdividendmd

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #4 on: July 07, 2015, 12:05:56 AM »
It's very possible to use Betterment in addition to retirement accounts. I do.

It simply requires you familiarizing yourself with Betterments funds.

As an example you could own an s&p fund instead of TSM or a mix of s&p and vanguard mid cap / and small cap funds (none of which betterment owns).

Totally doable, and well worth the 25 minutes of research and 10 minutes of  trading it would take to do it, in exchange for TLH in your taxable account.

johnny847

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #5 on: July 07, 2015, 12:24:05 AM »
It's very possible to use Betterment in addition to retirement accounts. I do.

It simply requires you familiarizing yourself with Betterments funds.

As an example you could own an s&p fund instead of TSM or a mix of s&p and vanguard mid cap / and small cap funds (none of which betterment owns).

Totally doable, and well worth the 25 minutes of research and 10 minutes of  trading it would take to do it, in exchange for TLH in your taxable account.

Sure it can be done. And as you say, it can be easily done. But there is also the question of whether Betterment is actually worth the cost in the first place. That is of some debate in other threads on this forum, but I am of the no camp.

EDIT: And what I said is still true - it's virtually impossible to use Betterment if you have investments elsewhere that track the same indices.

Although really by "use" I meant "actually benefit from."
« Last Edit: July 07, 2015, 12:25:44 AM by johnny847 »

Tabaxus

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #6 on: July 08, 2015, 12:56:11 PM »
It's very possible to use Betterment in addition to retirement accounts. I do.

It simply requires you familiarizing yourself with Betterments funds.

As an example you could own an s&p fund instead of TSM or a mix of s&p and vanguard mid cap / and small cap funds (none of which betterment owns).

Totally doable, and well worth the 25 minutes of research and 10 minutes of  trading it would take to do it, in exchange for TLH in your taxable account.

This is a fair observation.  I'd prefer not to complicate my retirement accounts, and it doesn't seem to me that it would be possible to replicate TSM in my retirement accounts while avoiding indeces that Betterment uses while preserving my good low-cost structure, but maybe I'm wrong.

I don't currently have a taxable account--have a pile of cash sitting in a bank account (struggling with how much to hold back for a house downpayment vs. how much to go ahead and invest).  So, fortunately, I don't have any costs associated with moving into Betterment, if I can make that work.

Izzozi

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Re: Wash Sale? Sell Vanguard TSM MF, Buy Vanguard TSM ETF
« Reply #7 on: July 10, 2015, 08:46:52 PM »
The IRS has never clarified what "substantially identical" actually means.

I see this everywhere, and it surprises me that every possible case (two funds tracking the same index, mutual fund and etf, two funds tracking similar indexes, etc...) hasn't already come up in thousands of audits - or is it just that the rulings have been inconsistent?