Getting Around the Wash Sale Rule with ETFs

Generally you want to avoid any investment tips that start off with “getting around… ” But this time, I think you should pay attention.

ETFs can be used to perform a tax swap. What this means is that you can sell an ETF that has losses, apply the losses against gains from other sales, and then purchase another ETF that is similar, but not the same, to the one you sold and maintain sector exposure. Normally this is impossible to do with single company stock because the IRS has put in place the wash sale rule which eliminates an investor's ability to claim a loss if they sold and purchase the same stock within 30 days.

Near the end of every year, it might be worth looking at your holdings and investigating ways in which you can take advantage of what I've described above. The only trick is finding a sector equivalent ETF that is sufficiently different from the one you sold so as to avoid triggering the wash sale rule. Fortunately, since the holdings of ETFs are public and updated regularly, finding appropriate alternatives is quite doable.