I wasn’t sure where to take today’s FZ Daily.
There were two lessons today:
1) Don’t pay attention to short-term fluctuations
2) Why it was a great day for tax loss harvesting
They say you should only convey one concept at a time, so I’ll do one today and one tomorrow.
How tax loss harvesting works
You sell one investment and then immediately buy a similar, but different investment simultaneously.
For instance, we only use broad-based ETF’s at Financial Zen.
Every ETF we use either tracks an S&P Index or Russell index.
So today I swapped out 9 S&P-based ETF’s for the corresponding Russel-based ETF’s.
What about the wash sale rule?
You may know that if you sell for instance, Facebook at a loss and then buy back Facebook within 30 days, then the IRS will “disallow” your loss.
That means they’ll ignore the loss that you realized and you just paid transaction costs for no good reason.
But you CAN buy a similar, but different stock. You could sell Facebook and buy Google without triggering the wash sale rule.
That way if Big Tech recovers, you’ll still ride the wave up.
But then you own Google and not Facebook. If you wanted to buy GOOG, you should have bought it in the first place.
The secret ETF loophole
HOWEVER, there’s a loophole when you’re using ETF’s like Financial Zen does.
A large-cap growth S&P 500 index fund will basically do the same that a large-cap growth Russell 1000 index.
So if you sell an S&P fund and buy a Russell fund, you pretty much own the same investment.
But in the eyes of the IRS, they are dissimilar enough that they won’t trigger the wash sale rule.
The best of both worlds
So you get the best of both worlds when you use broad-based index ETF’s. You can realize the loss and STILL own the exact investment that you want to own.
(If you’re a FZ Member, make sure to join Financial Zen Live! tonight, where I’ll take you through the details of how we tax loss harvested in your taxable accounts today.)
