5

In this answer to this question, JoeTaxpayer writes:

To take the loss this year, he'd have to sell soon, and can't buy it back for 30 days. If, for whatever reason, the stock comes back a bit, he's going to buy in higher.

To be clear, the story changes for ETFs or mutual funds. You can buy a fund to replace one you're selling, capture the loss, and easily not run afoul of wash sale rules.

Can someone explain, briefly, the rules for selling stocks and how that differs from ETFs and mutual funds, in relation to that quote (tax write-off for the loss)?

From Joe's words, it sounds like you can't sell a stock and then buy any shares of that same stock within 30 days (and take a tax write-off for any loss). But when I read Joe's answer, it sounds like the rules may be different for ETFs and mutual funds. Yet according to this Q/A, it seems like the type of security makes no difference (stock vs. ETF vs. mutual fund).

Given that Joe is an expert on these things, and I'm not, I think I may be misunderstanding what he wrote.

Are wash sale rules different for stocks versus ETFs / Mutual Funds?

Improve this question

3 Answers 3

Reset to default
5

What JoeTaxpayer means is that you can sell one ETF and buy another that will perform substantially the same during the 30 day wash sale period without being considered substantially the same from a wash sale perspective more easily than you could with an individual stock. For example, you could sell an S&P 500 index ETF and then temporarily buy a DJIA index ETF. As these track different indexes, they are not considered to be substantially the same for wash sale purposes, but for a short term investing period, their performance should still be substantially the same.

Improve this answer
4

The IRS rules are actually the same.

26 U.S. Code § 1091 - Loss from wash sales of stock or securities In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed...

What you should take away from the quote above is "substantially identical stock or securities." With stocks, one company may happen to have a high correlation, Exxon and Mobil come to mind, before their merger of course. With funds or ETFs, the story is different. The IRS has yet to issue rules regarding what level of overlap or correlation makes two funds or ETFs "substantially identical."

Last month, I wrote an article, Tax Loss Harvesting, which analyses the impact of taking losses each year. I study the 2000's which showed an average loss of 1% per year, a 9% loss for the decade. Tax loss harvesting made the decade slightly positive, i.e. an annual boost of approx 1%.

Improve this answer
2
  • Thanks Joe. Without the IRS issuing rules regarding what level of overlap or correlation is acceptable, what's a taxpayer to do?
    – End Anti-Semitic Hate
    Dec 14, 2015 at 5:32
  • Editing the answer on the original question might be a good idea too given the stated confusion on this new question.
    – user32479
    Dec 14, 2015 at 12:07
3

No, there's nothing special in mutual funds or ETFs. Wash sale rules apply to any asset.

Improve this answer
2
  • 1
    Confirmed experimentally. (Oops.)
    – keshlam
    Dec 12, 2015 at 6:25
  • I didn't mean to imply buying the exact same fund/etf, Eric, in his answer has it correct, one can swap one fund for another, maintain 99.9% (or some high number) correlation, but avoid wash sale.
    – JTP - Apologise to Monica ♦
    Dec 12, 2015 at 13:01

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .