Question about wash transactions...

First off, you can only have a wash sale if you are trying to book a loss. That said... the answer is MAYBE.

The wash sale rule came into existence in 1921. That's the first time the words "substantially identical" were used. Over the last 92 years the US Treasury has published zilch in the form of guidance. Therefore, there is no bright line test. Tax practitioners are going to differ on the meaning of those two words. I tend to take a conservative approach. I want to know whether one's position in the market has changed. In some cases, it is easy. Owning IBM is not the same as owning DEll or HP or Apple. In other cases it may be a little gray. Is owning SPY substantially identical to owning IVV? (Two S&P 500 ETFs). Comparing the two tell me that they are substantially identical and would create a wash sale on a loss. Is owning SPY substantially identical to owning VFINX (Vanguard's 500 Index Fund). A close look at their pricing and performance history tells me that the actively managed VFINX is not substantially identical to SPY an ETF that tracks the S&P 500 index.

So the answer to the question is... what do you mean by "similar" and how risk averse are you?

Okay... To be more specific, selling one NYS municipal bond fund and buying another. Unlike the S&P500 funds they own different bonds and track somewhat differently; but are pretty similar. So, they are more different than SPY and IVV, but more similar than IBM and Dell.

Is it a matter of being risk adverse? The worst they can do is demand I treat it as a wash, and they aren't likely to notice; I can't imagine they would claim fraud. I just don't want to do something wrong as a matter of principle.

Two actively managed municipal bond funds investing in one state's bonds would not be substantially identical if their holdings are too different. IMHO

This isn't "more specific", it's completely different. Index funds, by definition, just buy exactly what's in the index, at the same proportions. Other than fees, you wouldn't expect there to be any performance difference between two similar index funds.

But in any case where there's a fund manager actively making decisions about what to buy, they're substantially different. Just because they invest in the same sector, or have similar investment objectives, does not make them substantially idential. There will usually be some correlation, but would anyone really consider a 1-star fund to be equivalent to a 5-star fund in the same category?

Even the IRS isn't that insane!

Not so fast. Even index funds tracking the same index need not be substantially identical. You have to look at the details. Many (perhaps most) index funds do not purchase everything in the index in proportion to the index composition. They come close, but they use additional tools to achieve performance that mirrors the index itself. Differences among the tools can lead to performance differences beyond those attributable to fees. Take a look at an index fund's prospectus to know for sure.

Ira Smilovitz