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I've been curious about this topic for some time now, especially since the IRS language regarding wash sales seems a bit ambiguous. What does "substantially identical" really mean? For example, if I sold a foreign bond fund such as PFODX at a loss, could I buy a bond fund that doesn't typically invest in foreign bonds, such as DODIX, within 30 days?
IMHO, despite there being no definitive definition of what "substantially identical" means for mutual funds, no one would say that your two funds are substantially identical.
But where does one draw the line? Mr. Thomas asks: "Can you sell one S&P 500 index fund at a loss and buy a different S&P 500 fund the same day without having a wash sale?"
He responds that reasonable people can differ, though he (and conventional wisdom) suggest that such a swap would constitute a wash sale. I've always been intrigued by the one off question - can you swap an S&P 500 index for an S&P 499?
In the 90s, there was a fund, Transamerica Premier Index Fund (then TPIIX), that included the 500 stocks in the index except "that Transamerica Corporation [TA] common stock [was not] purchased." I wouldn't try such a swap either, but it was an interesting thought experiment.
Interesting. Thanks for the info. Things get a little bit more hairy when you try to compare bond funds, IMHO. For example, selling an investment grade bond fund and buying a multi sector bond fund? Or what about selling a GNMA fund and buying a Investment grade bond fund?
Funds of different types are clearly not "substantially identical" - they're not benchmarked against the same index, they're not expected to have parallel performance. You're assuming different risks and rewards when you invest in an IG bond fund or in a multi-sector fund.
Even if you were to swap Coke (KO) for Pepsi (PEP), you wouldn't have a wash sale. These are two different companies, with not identical business models, not identical markets, etc.
Likewise, one can make a pretty strong case that two actively managed funds, even in the same category, are not substantially identical. The funds have different portfolios that are supposed to behave differently (i.e. they're going their own, different ways to try to beat their benchmark). So you've got different risks with two different bond funds - different credit ratings, different maturities, different durations, different geographic distributions, different weightings of sectors, etc. The funds aren't nearly identical, nor are they trying to be (unlike two index funds that are trying to match the same index).
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http://finance.zacks.com/substantially-identical-mutual-funds-5850.html
IMHO, despite there being no definitive definition of what "substantially identical" means for mutual funds, no one would say that your two funds are substantially identical.
But where does one draw the line? Mr. Thomas asks: "Can you sell one S&P 500 index fund at a loss and buy a different S&P 500 fund the same day without having a wash sale?"
He responds that reasonable people can differ, though he (and conventional wisdom) suggest that such a swap would constitute a wash sale. I've always been intrigued by the one off question - can you swap an S&P 500 index for an S&P 499?
In the 90s, there was a fund, Transamerica Premier Index Fund (then TPIIX), that included the 500 stocks in the index except "that Transamerica Corporation [TA] common stock [was not] purchased." I wouldn't try such a swap either, but it was an interesting thought experiment.
The quote is from the Transamerica Premier prospectus, 1997.
Even if you were to swap Coke (KO) for Pepsi (PEP), you wouldn't have a wash sale. These are two different companies, with not identical business models, not identical markets, etc.
Likewise, one can make a pretty strong case that two actively managed funds, even in the same category, are not substantially identical. The funds have different portfolios that are supposed to behave differently (i.e. they're going their own, different ways to try to beat their benchmark). So you've got different risks with two different bond funds - different credit ratings, different maturities, different durations, different geographic distributions, different weightings of sectors, etc. The funds aren't nearly identical, nor are they trying to be (unlike two index funds that are trying to match the same index).