Wash Sale - Like in Kind

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Hello Experts,

How can you tell what ETFs might trigger wash sales rules for like in kind between selling and repurchase in 60 days? If two premium income ETFs which are focused on producing income through options but make option calls on different stocks are bought and sold within 60 days of each other, would that trigger a wash sale because they are both income ETFs or no because they are focused on options for different sectors? 

[Andrew_W · Accepted solution]

The wash sale rule applies when substantially identical securities are sold and re-purchased within 30 days. For ETFs, the underlying assets held by the fund would generally be compared and if considered substantially similar, wash sale rules would be triggered. Unfortunately, there is no clear line that defines this.

For example, if two premium income ETFs focus on completely different sectors (e.g., one on tech stocks, another on healthcare), they would likely not be considered substantially identical, meaning a wash sale wouldn't be triggered.

However, if both ETFs use similar options strategies on stocks within the same broad market or sector, even if the specific holdings vary slightly, they could be deemed substantially identical. The key is whether they aim for the same investment objective and track similar underlying assets. To be safe when taking a loss with similar assets, either wait 31 days before repurchasing (the full 61 day window), or choose an ETF with a truly different investment strategy, underlying index or sector focus.

This article helps illustrate this concept as well: Wash Sale Rule: What Is It, How Does It Work, and More