Wash sales and dividend reinvestment

A recent thread asked about triggering the wash-sale rule by selling
a mutual fund or ETF that was enrolled in dividend reinvestment.
I'm in that situation too. The money impact isn't that great --15% of
$660 -- but the paperwork is daunting.
Is there any chance that automatic dividend reinvestments could be an
exception to the wash-sale rules? At worst they're a partial
exception, since they tend to be fractional shares. Unfortunately,
Vanguard's VXUS ETF (international stock index) declares large
quarterly dividends, compared for example to the total US stock fund,
VTI. The December VXUS dividend was about 10% of the dollar value I
want to sell for rebalancing.
Here's a URL I found on this issue:
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"For the casual investor I suggest you ignore the effects of wash sales. Vanguard (and other brokers) are not required to compute the tax consequences of a wash sale and adjust the cost basis of shares appropriately. If you are making $1,000 investments every month and then need to withdraw $30,000, and you have a trade lot with a significant loss, the wash sale rules will realize $29,000 of the loss and be subject to using the $1,000 trade lot that is within 30 days. For the casual investor, the benefits of saving and investing $1,000 every month or reinvesting dividends outweigh the potential wash sale if you you don?t think you are going to have frequent withdrawals."
I don't quite understand what is meant by "ignore the effects of wash
sales". Does he mean that they _are_ wash sales, but we shouldn't let
them affect out investing strategy, including rebalancing? Or does
that bit about "are not required to compute the tax consequences"
mean that if I sell at a loss with 30 days after a dividend
reinvestment I am truly not subject to the wash-sale rule? This is an
ETF, if it matters -- not an individual stock or even an old-style
mutual fund.
Reply to
Stan Brown
Thanks to those who replied, even though the answer wasn't the one I wanted. :-)
I've been doing more reading, and it's even worse than I thought (or knew to ask) a week ago. For those who may not know about Revenue Ruling 2008-5:
If you have the same or "substantially identical" securities in an IRA and a non-IRA account, selling in the non-IRA and buying in the IRA can trigger the wash-sale rule, and in that case the capital loss is not just deferred but permanently lost: you can't step up the basis of the purchased security in your IRA and you can't offset the capital loss in your non-IRA against any other capital gains, nor against ordinary income. And because it's different accounts, the brokerage may provide little or no help with the accounting. Yikes!
And all of the above is true even if the accounts are in different brokerages.
For this reason, it looks like it is prudent not to have the same securities, or the same mutual funds or ETFs, in a non-IRA account and an IRA.
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I know griping about taxes is pointless, but it really does seem that applying the wash-sale rule to _automatic_ dividend reinvestments is unreasonable and unfair. It causes a lot of nasty paperwork, victimizes people who aren't actually trying to do a tax fiddle, yet doesn't get much money for the Treasury. And because the wash-sale rule is for a purchase or reinvestment 30 days before _or_ after the sale, even if you know about wash sales you can't stop one from happening unless you turn off dividend reinvestment, thus going against good investment strategy.
Reply to
Stan Brown
The rule was created for a purpose - to prevent someone from taking a loss on stock but then essentially keeping the stock. It's a pretty blunt tool and perhaps could be more nuanced. But unfortunately at the moment it's not. If you have a better idea, write to your senator or congress person. They might appreciate an alternative that would work as well but be more nuanced.
Reply to
Stuart O. Bronstein
As Stan wrote, griping about taxes is pointless, but I've already bitten ...
In the multiple lots case, do Congress and/or the IRS even need to act? AFAIK, there's nothing that requires a broker to report a wash sale when a single order is executed as multiple lots, milliseconds apart.
Reply to
Ian Pilcher
In article <r04g6k$s5u$ snipped-for-privacy@dont-email.me,
Could someone clarify how splitting the order could make it a wash sale? A wash sale is when you have both a sale (at a loss) and a near-time purchase. When you split an order, it goes from one sale to multiple sales, or one purchase to multiple purchases. But it's still not one of each.
Reply to
Barry Margolin
Maybe I'm missing something, but how would selling at a loss in multiple lots avoid triggering the wash-sale rules?
Reply to
Stan Brown
In article <r04g6k$s5u$ snipped-for-privacy@dont-email.me you write:
If it's a single order, the lots will all be sales or all be purchases, so how could that be a wash unless it'd already be a wash as a single lot?
It seems to me that if you trade often enough that wash sales will be an issue, don't sign up for DRIP, at least not for the stocks you're likely to trade. Or if you're forced to sell a stock unexpectedly, only the most recent DRIP can be a wash.
Reply to
John Levine

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