We recently received the following question:
I am interested in selling VFIAX for a loss in my taxable account and buying another S&P 500 ETF like VOO in my Roth IRA. I know there are wash sale rules. Would they apply here?
The wash sale rules regarding selling a mutual fund and buying an exchange-traded fund (ETF) version of the fund center around whether the ETF being purchased is “substantially identical” to the mutual fund that was sold.
We think Vanguard 500 Index Fund Admiral Shares (VFIAX) and Vanguard S&P 500 ETF (VOO) may be considered substantially identical investments because they are effectively the same fund at Vanguard. So much so that on VOO’s profile, Vanguard states, “Also available as an Admiral™ Shares mutual fund” linking to VFIAX.
If you’d like to divest from VFIAX when it has a loss in your taxable account, we would recommend looking at other similar but substantially different ETFs to assist you in staying fully invested.
The IRS has very limited case law on what constitutes a substantially different fund. Thus, the best advice is to consult with a tax attorney to get legal advice on this topic. We cannot give legal advice.
However, in our own trading, we typically think that if the new ETF has enough differences — such as a different expense ratio, different holdings, different manager, different fund family, different strategy — that it is defensible as substantially different.
SPDR MSCI USA StrategicFactors ETF (QUS), for example, is a large cap fund which may assist in helping you remain invested after a sale of VFIAX.
As a reminder, a wash sale occurs when you sell a holding in a taxable account for a loss and purchase a substantially identical holding in any of your account types either 30 days before or after the sale.
If you’d like to read more about this, our article “Tax Loss Harvesting and Wash Sales” has additional information.
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