Can I sell an ETF then buy it back?
Watch the wash sale rule
Key Takeaways
ETFs are structured in a way that avoids taxable events for ETF shareholders. ETFs can avoid the wash sale rule because ETFs typically are an index for a sector or a group of stocks and are not "substantially identical" to a single stock.
Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.
This method is employed as a means of lowering the investor's taxable income. To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it.
Just as with individual securities, when you sell shares of a mutual fund or ETF (exchange-traded fund) for a profit, you'll owe taxes on that "realized gain." But you may also owe taxes if the fund realizes a gain by selling a security for more than the original purchase price—even if you haven't sold any shares.
Thanks to the tax treatment of in-kind redemptions, ETFs typically record no gains at all. That means the tax hit from winning stock bets is postponed until the investor sells the ETF, a perk holders of mutual funds, hedge funds and individual brokerage accounts don't typically enjoy.
Note: Wash sales are in scope only if reported on Form 1099-B or on a brokerage or mutual fund statement. Click here for an explanation. A wash sale is the sale of securities at a loss and the acquisition of same (substantially identical) securities within 30 days of sale date (before or after).
One common strategy is to close out positions that have losses before their one-year anniversary. You then keep positions that have gains for more than one year. This way, your gains receive long-term capital gains treatment, lowering your tax liability.
Specifically, a fund is prohibited from: acquiring more than 3% of a registered investment company's shares (the “3% Limit”); investing more than 5% of its assets in a single registered investment company (the “5% Limit”); or. investing more than 10% of its assets in registered investment companies (the “10% Limit”).
The top reasons for closing an ETF are a lack of investor interest and a limited amount of assets. For example, investors may avoid an ETF because it is too narrowly-focused, too complex, too costly, or has a poor return on investment.
Can I sell stock at Gain and Buy Back immediately?
You can buy the same stock back at any time, and this has no bearing on the sale you have made for profit. Rules only dictate that you pay taxes on any profit you make from assets. To profit in stocks, means that you make rich rewards.
Retail investors can buy and sell stock on the same day—as long as they don't break FINRA's PDT rule, adopted to discourage excessive trading.
If you have a wash sale, however, you cannot claim the write-off until you finally sell the asset and avoid repurchasing it for at least 30 days. After that period, you can re-buy the asset without triggering the wash-sale rules.
First, you'll need to sell shares of the ETF; the proceeds of the sale will be available in your settlement fund within your account. Once the proceeds settle, two business days after the trade date, you can purchase shares of another security.
Trading ETFs and stocks
There are no restrictions on how often you can buy and sell stocks or ETFs. You can invest as little as $1 with fractional shares, there is no minimum investment and you can execute trades throughout the day, rather than waiting for the NAV to be calculated at the end of the trading day.
ETF trading generally occurs in-kind, meaning they are not redeemed for cash. Mutual fund shares can be redeemed for money at the fund's net asset value for that day. Stocks are bought and sold using cash.
Tax loss rules
These capital losses can be used to offset capital gains (from any investments, not just ETFs) and up to $3,000 of ordinary income ($1,500 for married persons filing separately). Capital losses in excess of these limits can be carried forward and used in future years.
Vanguard Intermediate-Term Tax-Exempt Bond ETF is designed for tax-sensitive investors with an intermediate-term time horizon and a preference for passive management. The new ETF has an expense ratio of 0.08%, compared with the average expense ratio for competing funds of 0.37%1.
However, like fees on mutual fund, those paid on ETFs are indirectly tax deductible because they reduce the net income flowed through to ETF investors to report on their tax returns. Other non-deductible expenses include: Interest on money borrowed to invest in investments that can only earn capital gains.
A wash sale itself is not illegal. Claiming the tax loss on a wash sale is, however, illegal. The IRS does not care how many wash sales an investor makes during the year. On the other hand, it will disallow the losses on any sales made within 30 days before or after the purchase.
Are wash sale losses gone forever?
Your loss is a "wash" in this scenario, just as though you had held your original shares without selling. The tax benefit of your capital loss isn't gone forever, but it's deferred.
The wash sale rules are designed to prevent people from selling investments and then buying the same stock back. Investors do this for the sole purpose of: Creating a deductible loss. Using the loss to offset other shares sold for a gain.
It's rare for an index-based ETF to pay out a capital gain; when it does occur it's usually due to some special unforeseen circ*mstance. Of course, investors who realize a capital gain after selling an ETF are subject to the capital gains tax. Currently, the tax rates on long-term capital gains are 0%, 15%, and 20%.
Holding period:
If you hold ETF shares for one year or less, then gain is short-term capital gain. If you hold ETF shares for more than one year, then gain is long-term capital gain.
Market risk
The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.
