So I began actively making investments in my etrade account this year (as opposed to just putting all of our investment money into a managed account, which we do as well).
I started the year off just buying stocks and funds in our brokerage account that we’ve had for years. Then I opened a Roth IRA through eTrade as well. Now I’m wishing I had done more of this early-year investing into my Roth.
I know I can’t do a straight transfer of stock from one account to the IRA, but I can sell shares from the one account, transfer the money (staying under the 6,000 limit) to the IRA as part of my 2020 contribution, and re-purchase those ETFs in the Roth.
Here’s my question: I was thinking I’d start things off by selling the ETFs in my brokerage account that I’m in the red on (stupid growth stocks), so as not to show any taxable gains when I sell them. But will I run afoul any rules or laws if I sell at a loss, transfer the funds to my Roth IRA, and then immediately re-purchase the same ETFs in my Roth? I know there’s wash sale stuff with 30-day rules out there that I don’t fully understand, so I put this here for any knowledgeable investment Dopers to help me with.
I believe yes (although this stuff can be complicated, so I’m not totally sure). The point of the wash sale rule is to prevent people from doing exactly what you want to do: take a taxable loss by selling something without actually selling it, which is what you do if you sell and then immediately (for values of immediately less than 30 days) buy it again.
I don’t believe there’s a “bought it in an IRA after selling it in taxable” exception to the wash sale rule.
The good news is that you can avoid the wash sale by buying different ETFs. And the differences don’t have to be particularly big, just buy a different index that doesn’t exactly track what you sold, then you can sell it after 30 days and buy the one you want. You take some risk that what you buy will diverge from what you want, but it’s really not that big. There are lots of indexes that are like 99+% correlated with each other.
If you sold shares in a taxable account then purchased shares in an IRA the wash rule would apply and you wouldn’t be able to use any losses to offset gains. You would have to add the losses to the cost of the new shares adding to your basis cost.
I edited to remove a lot of stuff about doing a conversion from IRA to Roth, which you can do but really doesn’t apply since you went from taxable to IRA.
Replying to my own post to say that if you bought the same share in a different taxable account you’d have to use the losses to increase your basis, but in an IRA you wouldn’t. You still can’t deduct the losses though. Here’s the IRS publication.
Yeah, the basis is the cost you paid. You subtract it from the sale price when you sell it to determine your income for taxes. Usually it’s whatever you paid for something but there are other cases that can update the basis.
I believe what Bill is saying is that you can carry your original basis over to the new shares. Example: let’s say you own some shares of ABC that you originally bought for $10 a share. Current price is $9, so you sell them and buy the same shares of ABC in your IRA.
Because of the wash sale rule, you can’t claim the $1 loss against income, but you also don’t just lose it. So your new shares in the IRA have a basis of $10 a share, even though you only paid $9 for them, because the basis carries over. I’m not sure if all that is right, and even if it is, I think it’s immaterial if you’re going into a Roth IRA, because you don’t have to pay taxes on your gains in the Roth IRA.
Yeah, it’s exactly as iamthewalrus_3 says. It essentially makes it seem as if you had transferred the shares from one account to another even though technically you sold the original shares and purchased new ones.
I don’t know however, how the IRS determines if an investment is a substantially identical security. If you were to sell say, VTSAX, a Vanguard Total Stock Market Index Fund Admiral Shares mutual fund and purchase VTI, the Vanguard Total Stock Market Index exchange traded fund that’s obviously a wash sale.
What if instead to the ETF you were to purchase VFIAX, the Vanguard S&P 500 shares? There’s certainly a difference between them, one covers the entire market and the other covers just the S&P 500, but they overlap considerably. Then you could add a small cap stock fund to cover a lot of the securities that aren’t in both. Throw in a mid-cap index and you could probably duplicate 95% of the holdings in VTSAX. I’d hate to be sitting across the table from a forensic accountant trying to explain that I hadn’t run a ship of Theseus on the original security.
My understanding is that selling VTSAX and buying VTI and whatever the extended market fund is in the appropriate proportion (thus essentially recreating VTSAX) is probably not a wash sale.
Selling an index mutual fund and buying the identical ETF from the same company seems less likely to withstand scrutiny but has never been ruled on (AFAIK).
Selling an index fund from one company and buying a fund that tracks the same index from another company is also a tactic that has not been adjudicated by the IRS (but to me also seems sketchier that picking something that tracks a slightly different index).
I am not your financial advisor, nor a lawyer, but what I typically do is swap out different indices altogether. It is not difficult to find something that will track 99% yet clearly be not identical enough to trigger a wash sale.
Everyone is right about having to consider wash sale rules when churning your investments to put into an IRA, so I’ve nothing to say there.
I think the general understanding about “substantially similar” securities is that you can’t sell stocks at a loss and then buy in-the-money call options and claim you bought something different. A call option that is significantly in-the-money has essentially no difference in cash flows from the stock itself. Similarly, entering into a futures contract to buy a commodity less than 30 days after selling some at a loss would be considered a wash sale, even if the date of the futures contract is not within 30 days, since you’re at risk in the same way as if you had held on to the original commodity.
With mutual funds and ETFs, you might think that something similar might be the case, but really, you have no control over the make-up of the funds. When you buy a call option for the exact same stock you sold, you know for sure that the cash flows will be absolutely identical except for the small amount of time-value premium in the call option, which is why you would buy as in-the-money as available. When you buy a fund, you are at the mercy of the fund manager, and cannot guarantee that you get the same results as if you held it unless you buy the same exact fund. Yes, plenty of index funds will follow the same index, but owning a mutual fund or ETF is fundamentally different than holding a comparable slice of the securities the fund owns. It’s not a partnership where things are done as if each partner owned a slice themselves; what you own is a interest in a regulated investment company (RIC) subject to all sorts of rules that make owning them quite a bit different than owning the securities. The main difference I can see is that, as long as you’re changing funds, you’re probably going to be buying into a different amount of unrealized capital gains to be distributed at some point, so the cash flows you might expect, and the taxes you pay on those cash flows, will be inherently different unless the fund managers were following each other in lockstep and people were investing into them in equal amounts every single day.