A. ETFs make maximizing tax losses while avoiding violating wash sale rules a lot easier! Let's take a look what is tax loss harvesting and what is the wash sale rule:
Tax Loss Harvest
If you sell two securities, one with a $10,000 gain and one with a $5,000 loss, you only need to pay tax on the net gain of $5,000. If your tax losses exceed your gains, you can even offset $3,000 of your ordinary income, and carryover the rest losses to future years.
Wash Sale Rule
If you have a tax loss sale, the IRS does not allow you to deduct a loss if you buy a "substantially identical" security within 30 days before or after the sale. If you buy such a security within the window, your cost basis will be adjusted downward to reflect the unclaimed loss.
In our next blog post, we will look at what does "substantially identical" mean.