Tax Rules for ETF Losses - Fidelity (2024)

Exchange-traded funds (ETFs) have some features of both individual stocks and mutual funds, but are unique investment vehicles. Investors buy shares in ETFs just like they would buy stock in corporations. They hope to make a profit from these purchases, but things don’t always work out. What happens if you suffer a loss when you sell your ETF shares?

Tax loss rules

Losses in ETFs usually are treated just like losses on stock sales, which generate capital losses. The losses are either short term or long term, depending on how long you owned the shares.

  • If you held them for one year or less, the loss is short term
  • If more than one year, the loss is long term.

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. There is no limit on the years that the excess losses can be carried forward.

Harvesting losses

One of the opportunities that holding ETF shares presents is the ability to cherry-pick shares to be sold for optimum tax results. For example, say an investor buys 100 shares of XYZ ETF in January 2022 for $100 a share and another 100 shares in February 2024 for $150 a share. When the price of the shares drops to $90, the investor opts to sell half of the holdings. By designating that the February 2024 lot should be sold, the investor has maximized the loss ([$150 - $90] x 100 shares).

For tax purposes, in order that the correct basis for the lot be used in determining the loss, the investor must identify to the broker the shares that will be sold and receive written confirmation of the specification within a reasonable time. In the absence of such identification, it is assumed for tax purposes that the first shares acquired are the first shares sold. In the example above, this would mean that the January 2022 shares with a basis of $100 each would have been sold, minimizing the tax loss that the investor can recognize.

Watch the wash sale rule

If you buy substantially identical security within 30 days before or after a sale at a loss, you are subject to the wash sale rule. This prevents you from claiming the loss at this time. The wash sale rule also applies to acquiring a substantially identical security in a taxable exchange or acquiring a contract or option to buy a substantially equal security.

The tax law does not define substantially identical security, but it’s clear that buying and selling the same security meets the definition. For example, if you sell shares in the XYZ ETF at a loss and buy it back within the wash sale period, you cannot take the loss now. There has been no IRS ruling on whether ETFs from two different companies that track the same index are considered substantially identical.

ETFs can be used to avoid the wash sale rule while maintaining a similar investment holding. This is because ETFs typically are an index for a sector or other group of stocks and are not substantially identical to a single stock. For example, if you sell the stock of a drug company, such as Pfizer, Merck, or Johnson & Johnson, at a loss and then buy an ETF that tracks the drug companies, the wash sale rule does not apply. Examples of ETFs in this sector include iShares Dow Jones U.S. Pharmaceuticals, PowerShares Dynamic Pharmaceuticals, and SPDR S&P Pharmaceuticals.

It could also be argued that a sale of mutual fund shares at a loss, followed by the purchase of an ETF that is similar to the mutual fund, is outside the wash sale ban. The ETF price usually reflects the prices of the stocks it holds, whereas mutual funds shares tracking similar holdings may not have the same underlying value. In addition, there are different fees or other charges associated with mutual funds versus ETFs.

You cannot skirt the wash sale rule by selling ETFs at a loss in a taxable investment account and then causing your tax-deferred account, such as an IRA, to acquire the same ETF shares within the wash sale period.

The loss that is disallowed under the wash sale rule does not disappear forever. You can adjust the basis of the newly acquired shares to reflect the loss that cannot be claimed now so that you can take it later, when you sell these shares.

Special treatment for certain ETF losses

Currency ETFs do not generate capital gains or losses, but rather ordinary income or losses. This means that losses on the sale of shares in these ETFs produce ordinary losses that can be used to offset ordinary income, such as wages and bank interest.


ETFs are acquired with the expectation of realizing an economic gain. However, if the price of the shares declines, investors may make a financial decision to take losses. Work with a knowledgeable tax advisor to optimize the effect of these losses.

Tax Rules for ETF Losses - Fidelity (2024)


Can you write off ETF losses? ›

Currency ETFs do not generate capital gains or losses, but rather ordinary income or losses. This means that losses on the sale of shares in these ETFs produce ordinary losses that can be used to offset ordinary income, such as wages and bank interest.

What is the tax loophole of an ETF? ›

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.

What is the superficial loss rule for ETF? ›

The ITA also includes the “superficial loss" rule, also known as the "30-day rule." This rule prevents an investor or their affiliated persons from deducting a capital loss realized as a result of the sale of a security when the same security is repurchased within 30 days before or after the sale [1].

What is the wash rule for ETFs? ›

Investors who buy a "substantially identical security" within 30 days before or after selling at a loss are subject to the wash-sale rule. The rule prevents an investor from selling a security at a loss, booking that loss to offset the tax bill, and then immediately buying the security back at, or near, the sale price.

Can you write off 100% of stock losses? ›

If you own a stock where the company has declared bankruptcy and the stock has become worthless, you can generally deduct the full amount of your loss on that stock — up to annual IRS limits with the ability to carry excess losses forward to future years.

Are stock losses 100% tax deductible? ›

Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

How to avoid paying taxes on ETFs? ›

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.

Do you pay taxes on ETFs if you don't sell them? ›

If you hold these investments in a tax-deferred account, you generally won't be taxed until you make a withdrawal, and the withdrawal will be taxed at your current ordinary income tax rate. If you invest in stocks and bonds via ETFs, you probably won't be in for many surprises.

Do you pay taxes on ETF turnover? ›

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.

What is the 3 5 10 rule for ETF? ›

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”).

What is the 3000 loss rule? ›

If your capital losses exceed your capital gains, the amount of the excess loss that you can claim to lower your income is the lesser of $3,000 ($1,500 if married filing separately) or your total net loss shown on line 16 of Schedule D (Form 1040), Capital Gains and Losses.

What is the 3000 capital loss rule? ›

Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.

How do you avoid wash sale with ETF? ›

For example, let's say you took a loss on an ETF tracking the S&P 500® index (SPX). To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index® (RUI).

How do you avoid the wash rule? ›

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.

What is the wash sale rule in fidelity? ›

The Wash Sale Rule prevents an investor from obtaining the benefit of a tax loss without having reduced the investment. Under the rule, the loss is treated as "washed" when the new shares are acquired.

What investment losses can you write off? ›

Tax Loss Carryovers

If your net losses in your taxable investment accounts exceed your net gains for the year, you will have no reportable income from your security sales. You may then write off up to $3,000 worth of net losses against other forms of income such as wages or taxable dividends and interest for the year.

What investment losses are tax deductible? ›

Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.

Do ETFs have tax advantages? ›

ETFs are generally considered more tax-efficient than mutual funds, owing to the fact that they typically have fewer capital gains distributions. However, they still have tax implications you must consider, both when creating your portfolio as well as when timing the sale of an ETF you hold.

Can I offset investment losses against tax? ›

Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).

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