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A friend wants to sell a poorly performing mutual fund (see this question for details).

The fund is not in a tax-sheltered account.

According to his broker, there will be no fees to sell that fund and purchase another one offered from the same mutual fund company.

If my friend makes this "swap", will they still be able to claim the loss on their USA federal taxes?

Note: User ChrisInEdmonton asked if the new fund will be materially different than the current one. That's a great question. The broker wants to simply pick a "better" fund being offered from the same mutual fund company. He did not indicate whether or not it would materially different. From what I can tell, the IRS has not made it clear what "materially different" means for mutual funds that don't track specific indexes (see Wash sale rule + Mutual Funds/ETFs?).

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  • Is the other fund materially different from the one your friend is selling? Where is your friend located, for tax purposes? Is the mutual fund held in a tax-sheltered account?
    – ChrisInEdmonton
    Commented Dec 16, 2015 at 0:37
  • @ChrisInEdmonton Good questions. I'll update the main question above.
    – End Antisemitic Hate
    Commented Dec 16, 2015 at 0:52

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If the fund is "better" but materially the same (for example, in the same fund family but with lower expense ratio), then wash sale rules will kick in. If the fund is materially different (for example, selling US-stocks fund, buying international, or selling bonds fund and buying stocks) then you could probably claim the loss.

What is "materially different" is indeed a matter for interpretation, but my examples are pretty much safe. Small-cap vs Large-cap may also fly. SPY vs VOO - will definitely not.

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