Tax Tips Blog

Dave writes:
I’ve been reading and enjoying your tax tips blog.

I have a question about wash sale and mutual funds/etfs.

I just sold shares of Vanguard’s VPACX mutual fund (based on the MSCI Pacific Index) at a loss. To avoid wash sale rules and keep my capital loss, what am I allowed to buy within 30 days? Can I buy shares of VPL, Vanguard’s Pacific ETF which based on the same index as VPACX (and is actually a different share class of the same fund)? If not, what about the ADRA ETF, which is based on the Bank of New York’s Asia 50 ADR Index? The latter has significant overlap in holdings with VPL/VPACX, but has different allocation and some different positions.

Thanks,

David

My reply:

Hello David!  Thanks for your kind words about my blog.

You asked a very good question.

As I’m sure you’re aware if you sell a security at a loss your tax loss is disallowed if at some point during the 30 days before you sold the security or 30 days after you sold the security you purchased “substantially identical” securities.  These same rules apply to loss from sales of mutual fund shares. In fact, if you are automatically reinvesting your dividends, wash sales can become common.  Any disallowed loss due to the wash sale rule is added to the basis of the replacement shares purchased within the forbidden 61-day period.

Stocks issued by one corporation are not considered substantially identical to stocks issued by another corporation; however mutual funds aren’t as clear cut.  With mutual funds the IRS has taken the position that each transaction needs to be evaluated separately; thus they have not issued any clear guidelines as to what they will ultimately consider “substantially identical” and what they will not.  In other words, this is something that you’re going to have to make a decision on and document your reasoning in your personal tax records, just in case the IRS were to ever question it.

Some people take the view that no mutual fund is “substantially identical” to another, but I don’t agree.  It’s my belief that the wash sale rule is based on your position in the market.  Thus, in my opinion, two different mutual funds or ETFs that are based off of the same index and/or hold substantially the same securities would be considered “substantially identical” and be subject to the wash sale rules.

I hope this helps you make your decision.

Best wishes,
Gina

Ben asks:My question is regarding my subscription to investment newsletters and paid subscriptions to investment websites. Can I deduct that when i do taxes, if so what documentation will i need. I also have a sharebuilder account and pay a monthly fee for that. What about any losses i have incurred? Also, how would i go about getting the standard 30 for the spanish american war? Ben

My reply:Hello Ben! The costs of your investment subscriptions are deductible as miscellaneous itemized expenses on Schedule A, provided that you itemize deductions and that the total of your miscellaneous itemized deductions exceeds 2% of your Adjusted Gross Income (AGI). You should retain your receipts to prove this deduction, if necessary.

The monthly fee in your sharebuilder account is either another miscellaneous itemized deduction or a commission charged for the purchase of shares. If the fee is linked to the specific transactions it is a commission and adds to the cost basis of the shares purchased. If it is a flat fee that is charged whether or not you have any transactions or regardless of the number of transactions, it is a deductible investment expense.

Capital gains and losses don’t affect your taxes until you sell the investment. At that point you report the sale on Schedule D and calculate your gain or loss.

The $30 refund of the Spanish American War tax, also referred to as the Telephone Tax Refund, has a special line in the “payments” section of Form 1040 or its variants.

A reader would like to know: I have a short term stock loss (held under 1 year). Can I apply this loss against a long term stock gain or must the short term stock loss be applied to a short term gain? Thanks.

My reply: Stock sales can be quite confusing, as evidenced by a recent report from the General Accounting Office (GAO). The GAO estimated that 8.4 million individual taxpayers with securities transactions incorrectly reported their capital gains or losses on their tax returns for the 2001 tax year. I strongly recommend that anyone who has any stock transactions hire a qualified tax professional to help them determine their correct basis and reporting requirements.

Once the appropriate basis and gain or loss has been determined then they are usually netted in the following order:

1. Short-term capital losses are applied against short-term capital gains while Long-term capital losses are applied against long-term capital gains.
2. Any remaining short-term capital loss (from number 1) is applied against any remaining long-term capital gains (from number 1) while any remaining long-term capital loss (from number 1) is applied against any remaining short-term capital gains (from number 1).
3. You can apply up to $3,000 of any remaining capital losses (from number 2) against regular income and carryforward any remaining loss (from number 2).

In addition to finding a qualified tax professional to help you, you may be interested in reading IRS Publication 550.