Tax Follies

msf

No, not the upcoming battle royal on next year's tax rules. Just items doing this year's. I ran across two curiosities so far.

1. Wash sales - when you sell everything, you cannot create a wash sale, even if you purchased some of those securities just a week before you sold them (i.e. within 30 days). This is just common sense. A wash sale requires you to purchase a replacement security, and what you just purchased isn't a replacement if you're dumping everything.

Kaye Thomas posted a clarification to his Fairmark.com page on replacement shares. The clarifying example is:
1/5 - buy
1/11 - buy more
1/15 - sell all

The 1/11 shares cannot be replacements for the 1/5 shares, since everything is sold together.

On a 1099 I'm helping someone with, Pershing had declared the sale of the 1/5 shares to be a wash sale. As such it adjusted the price (and purchase date) of the 1/11 shares. That doesn't seem right, and I'm waiting to see how the broker and the Pershing back office will respond.

2. Single state muni funds typically don't provide state-by-state breakdowns of their holdings. If you're in Michigan and hold a Calif. muni fund, you'd like to know what portion of that fund is invested in territory bonds (PR, VI, Guam). Income from those bonds is tax exempt for you even if the rest isn't.

At least most muni funds seem to be 100% tax free for their designated state. Not so for Fidelity funds. A portion of their NY MMF is taxable to NY residents, and they'll tell you how much. But part of that NY-taxable portion might consist of Michigan bonds that would be tax-free in Michigan. I called up Fidelity and they were not able to find a breakdown of their funds.

Oddball cases to be sure. Just something to keep accountants up at night.

LLJB

I'm not a tax accountant so I'd be happy for corrections if I get something wrong, but as an interesting tangent... if the 1/5 buy was instead a sale and at a loss, then it would be a wash sale with the 1/11 purchase. When everything is sold on 1/15 then you've essentially eliminated the impact of the wash sale on total gains and losses but maybe not the impact on the tax owed.

I think if the shares sold on 1/5 were long-term then the portion of the shares purchased as replacements on 1/11 become long-term. If the price increases by the time everything is sold on 1/15 then it could be that you have a smaller long-term loss and a smaller short-term gain and that's a tax benefit. If the price went down between 1/11 and 1/15 I think the impact would be the opposite. I guess the final answer also depends on which cost basis method you use but if someone was able to predict those short term price changes they could save a little taxes too.

The muni fund case is weird. Wouldn't you think Fidelity and others would be legally required to keep track of and report the information necessary for people to do their taxes? Maybe its a case where there's no compelling reason for them to change, the people from Michigan (or other places) who pay too much tax might not be the target audience of another state's muni bond fund so maybe if you complain they just tell you to sell the fund if you don't like it (in nicer words of course).

msf

If I understand your example correctly, you're adding an implicit long term purchase - that is, you're coming into this sequence of trades already owning some shares:

2013 (say)  buy 100 shares
1/5         sell 100 shares (at a loss)
1/11        buy 100 shares (replacement, creating wash sale)
1/15        sell 100 shares

You're correct that the 1/11 replacement shares become long term. Technically you add the number of days you held the 2013 shares to the number of days you actually held the 1/11 shares to get the holding period of those replacement shares.

Long term (2013) + any holding period = long term

You've also got the tax impact right - it's a shifting of short term gain/loss into long term gain/loss because of the re-dating.

On the muni front, I dug up a different set of funds to illustrate the problem. As some of us may recall, Oppenheimer Rochester muni funds earned a bit of notoriety this year for holding gobs of Puerto Rico bonds.

Here's their year end tax info. On p. 8 you have the state-by-state breakdown of all their funds including their single state funds.
https://www.oppenheimerfunds.com/investors/doc/Year_End_Tax_Tables.pdf

Their NY fund was only 69.5% invested in NY, the rest was in territory bonds (PR, Guam, even Northern Mariana Islands). If you lived in Michigan and owned this fund, 31.5% of its income would be tax-free to you. I've not seen other fund companies give this sort of useful breakdown.

But at least the fund was 100% tax-free to NY residents. For every $100 of federally tax-free income that the Fidelity NY MMF spun off, only $91 was tax-free to NY residents. What about the other $9? Was that filled with Michigan bonds (which would have been tax free to Michigan residents), or Calif. bonds, or what? We'll never know.

I don't know what the law is requiring this sort of tax info. It only occurred to me because I'm helping someone who moved across state lines this year. But I'm also in this situation because, for legacy reasons, I own a muni bond fund for another state. I'd sure like to know what portion of that fund is tax-free in my state as well.

msf

Quick update - the broker advised that the wash sale error was known and had been corrected (the form is "in the mail"). But it wasn't available online.

LLJB

To the point, does anyone delay filing their taxes to avoid needing to file amended returns? How long? I do a handful of relatively simple returns for other family members and it would be easy to file as soon as they receive the initial paperwork but I always wait basically until the last minute so any corrections can be incorporated. Maybe its relevant that they're not getting big or any refunds, but I feel like I get more corrections in the last 5 or 7 years than I did previously.

davidrmoran

Yes, I have always done this for my own, for 45y.

msf

It used to be that all 1099s had to be mailed by January 31st. Now the IRS lets these go until Feb 15th, in theory to prevent the need for so many corrections. Still, there seem to be lots of corrections.

I tend to wait until, well, about now (mid March). I don't have anything particularly esoteric (most "complex" holdings are foreign mutual funds and muni bond funds). So there shouldn't be any reason other than sloppy processing for me to get corrections.

That said, one year Fidelity mailed its umpteenth correction to my 1099 on April 15th (or was it even April 16th?). That did not make me happy. It amounted to a few pennies, and I let it slide rather than refile.

msf

FWIW, I got a response from the broker on the wash sale. Chalk another one up to "the customer is always wrong" attitude.

As I explained, here and in writing to the broker, the clearing house Pershing said there was a wash sale because replacement shares were purchased a few days before total liquidation. Not correct, but at least sane.

Let me flesh out details slightly:
1/5 - sell fund A (actively managed)
1/5 - buy fund B (index ETF)
1/11 by more fund B
1/15 - sell all fund B

The broker responded that because of the sale of Fund A on 1/5, the wash sale rule was magically triggered and somehow applied to the Fund B shares purchased the same day.

Never mind that fund A was sold at a profit (you need a loss to trigger wash sale rules). The broker said that while not identical, these two funds were "similar", because they were in the same space. Sure, one was a small cap blend fund and the other was an R2K ETF, but really? "Similar"? They didn't even meet the straddle rule standard of 70% similarity (overlap), let alone the "substantially identical" requirement for a wash sale.

The broker didn't understand what Pershing did, and had to make up this "alternate fact" explanation to show that the customer was wrong.

I sent a response pointing out that if they're correct, and somehow the wash sale rule did trigger, then Pershing is still wrong. On the 1099 it neglected to note the wash on the sale of Fund A.

May your taxes be less stressful.