November 03, 2008 at 1:00 am by Tom Lydon
The market meltdown has created an opportunity at tax time for exchange traded fund (ETF) users.
John Spence for MarketWatch explains that when investors sell an ETF or mutual fund, any losses in excess of capital gains can be deducted from regular income up to $3,000 annually, with unused losses carried forward.
This tax management strategy can be valuable to investors. A tax swap involving the sale of one fund and the simultaneous purchase of another with similar objectives may create losses while maintaining market exposure and may not be subject to wash sale rules, says one analyst. These losses can actually be used to offset gains from other holdings.
The wash sale rule prevents investors from claiming a loss on a stock sale if a purchase of equal value is bought within 30 days of the previous sale.
We need to note that we are not accountants. Always contact your tax advisor first and have your tax situation evaluated.
One example of a tax swap with ETFs: selling SPDR S&P 500 (SPY) and purchasing any similar large-cap U.S. portfolio such as iShares Russell 1000 Index Fund (IWB).
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