Wash Sale Rules - ETFs and underlying securities

[paul-j-heckman]

Hi All - like many people, i am taking some losses in technology investments.  What I don't understand is, if i get back in at lower prices, if it constitutes a wash sale.  For example, to take popular tech funds like ARKK and ARKW, if i sell one to generate a loss, but then within 30 days I buy the other, will that constitute a wash sale?  Also, if i had held individual equities that happen to be part of one of the funds (Roku, for example), and I sell Roku at a loss and within 30 days buy back in to ARKK, will that also constitute a wash sale?  I don't really understand what "substantially identical" means.   I need to be certain on this as it has major tax implications going forward for me, so please only respond if you are certain.  I appreciate your help!

[Mike9241]

ARKK and ARKW. for there to be a wash sale they would have to be substantially identical, unfortunately, there is no absolute definition in the tax law or court cases to say whether that's the case. 

if the security has a CUSIP number, then it's subject to wash-sale rules. In addition, selling a stock at a loss and then buying an option on that same stock will trigger the wash-sale rule.

ETFs and mutual funds present investors a different set of challenges. Switching from one ETF to an identical ETF offered by another company could trigger a wash-sale. There are ways around this problem. For instance, an investor holding an ETF indexed to the S&P 500 at a loss might consider switching to an ETF or mutual fund that is indexed to a different set of securities, such as the Russell 1000 or Dow Jones Industrial Average.

The main difference between ARKK vs ARKW is, ARKK invests across different innovation sectors, such as genomic revolution, industrial innovation, fintech innovation and the next generation of internet innovation. ARKW is more focused on next generation of internet innovation such as big data, IoT and E-commerce.

essentially they would be investing in different companies 

a stock and an ETF are not identical - the first is just a stock the second is a basket of stocks.  if wash sales rules were applied to this situation it would create enormous reporting problems.    personally, I have bought stock A which is in ETF B and sold A at a loss and bought B within 30 days and never had a wash sale problem

one thing to watch out for is If you have a taxable account and an IRA.  you sell at a loss in the taxable account and within 30 days buy in your IRA . you have a wash sale and the loss in taxable account disappears  - you never get the benefit when you sell the wash sale loss in your regular a/c

[DianeW777]

The wash sale rule applies to stocks, mutual funds and exchange-traded funds. It can also apply to options and futures contracts to buy or sell a stock, but does not apply to losses on trades of commodity futures or foreign currency.

If I sell one to generate a loss, but then within 30 days I buy the other, will that constitute a wash sale?

• As a rule you would consider a wash sale when you sell and repurchase the same stock. If that occurs, then you would not be allowed the loss and instead that becomes part of the cost basis (added to the purchase price) of the stock purchased within the 60 day window (30 days before or after the sale).

I don't really understand what "substantially identical" means.

• The IRS has various tax language phrases that are not specific and so become interpretive. 
  • As far as 'substantially identical' the IRS included “ordinarily” in the description without any indication as to what that means. This could be interpreted to mean that a substantial difference in management or a substantial amount of overlap in similar mutual funds could constitute a substantially identical position.
  • Substantially identical securities can include both new and old securities issued by a corporation that has undergone reorganization, or convertible securities and common stock of the same corporation.

Example:  If I bought stock through my broker (Merrill Lynch, Charles Schwab, Vanguard, ETrade, etc) a wash sale would occur for the same stock but not for various stocks being held within an account.

[fanfare]

If you sell ROKU and then buy an ETF that holds ROKU, you do not get hit with a wash sale.

According to TD Ameritrade, the CUSIP must be identical to trigger a wash sale.

Anyway, that's what they told me is the way they do it.