Wash sale?

[Jim L.]

(e-mail address removed) (Jim L.)
I intend to sell MGSEX at a loss and buy NAESX to replace it. (MGSEX is
a small-cap managed fund and NAESX is a small-cap index fund).

Would that be considered a "wash sale"--- should I wait 31 days before
buying NAESX?

 

[joetaxpayer]

(e-mail address removed) (Jim L.)
I intend to sell MGSEX at a loss and buy NAESX to replace it. (MGSEX is
a small-cap managed fund and NAESX is a small-cap index fund).

Would that be considered a "wash sale"--- should I wait 31 days before
buying NAESX?

They both appear in the same Morningstar style box (small cap blend) but
that's about where the similarity ends.
To see if there's any chance of 'wash' claim, I looked at the top
holdings. The top ten holdings in the Vanguard index contains 2.69% od
assets, for the managed fund, 14.81%. Even then, only one stock was on
both lists. I am 100% certain you have no wash risk here.

The IRS, from what I've seen (or rather not seen) hasn't spelled out the
criteria for two different funds counting the same for purposes of the
wash sale rule. I'd hazard to say two index funds based on precisely the
same index does run afoul, but your two funds are not even close.

JOE
www.blog.joetaxpayer.com

 

[d.]

(e-mail address removed) (Jim L.)
I intend to sell MGSEX at a loss and buy NAESX to replace it. (MGSEX is
a small-cap managed fund and NAESX is a small-cap index fund).

Would that be considered a "wash sale"--- should I wait 31 days before
buying NAESX?

No. They are not substantially the same security.

 

[Elle]

I think the discussion at the following two sites, among
others, supports Joe's and d's claims that the IRS would
likely say (if asked) that you were not in violation of the
Wash Sale rules:

http://www.fairmark.com/capgain/wash/wsident.htm . See the
section titled "Mutual Funds."

http://www.bankrate.com/brm/itax/tips/20030114a.asp

 

[joetaxpayer]

http://www.fairmark.com/capgain/wash/wsident.htm . See the
section titled "Mutual Funds."

http://www.bankrate.com/brm/itax/tips/20030114a.asp

Similar to the question regarding whether an IRA purchase can run afoul
of wash sale rules (it can, and the IRS just made a specific statement
to the point), I think the rules regarding 'substantially identical
securities' can use some clarification.

While I think I'm comfortable answering when to me it's clear the two
securities are not similar, there's a grey zone the IRS has not
addressed. I'd agree with Fairmark that two [cap weighted] S&P index
funds are similar, despite the small difference in expenses from one to
the other. But for grey; How about the Rydex equal weighted S&P (ticker
- RSP) vs the regular cap-weighted Indices? In one year, one fund has
outperformed the other by more than 5%. Is that enough to claim they are
different?
JOE

 

[Elle]

Similar to the question regarding whether an IRA purchase
can run afoul of wash sale rules (it can, and the IRS just
made a specific statement to the point), I think the rules
regarding 'substantially identical securities' can use
some clarification.

I too saw this, though only today. For the archives:

http://www.nytimes.com/2007/12/22/business/22irs.html?ref=todayspaper

In sum and in Usenet language, one may no longer evade IRS
wash sale rules through sale and purchase etc. of the same
stock within 30 days using a non-IRA account and IRA
account.

Readers might also note the continued emphasis on how, of
all mutual funds, only those buys and sells of funds tied to
the same index are a focus for mutual fund wash sale
violations.

While I think I'm comfortable answering when to me it's
clear the two securities are not similar, there's a grey
zone the IRS has not addressed. I'd agree with Fairmark
that two [cap weighted] S&P index funds are similar,
despite the small difference in expenses from one to the
other. But for grey; How about the Rydex equal weighted
S&P (ticker - RSP) vs the regular cap-weighted Indices? In
one year, one fund has outperformed the other by more than
5%. Is that enough to claim they are different?

Two cents: If a person considers himself savvy enough to
make a profit via harvesting capital gain losses and so tax
advantages in this fashion, then he can darn well figure out
what risk he's taking with the IRS in doing so. ;-)