Page 14 - Investment Advisor December 2022/January 2023

ETF ADVISOR

By John Manganaro

Tax Loss Harvesting Is Easier With ETFs,

But Watch the Wash Sale Rule

Advisors shouldn’t wait to conduct loss harvesting because they suspect

the markets could drop further, according to one expert.

yan Losi, an executive vice
president of the boutique
R certified public accounting
firm PIASCIK, says there’s an impor-
tant but often overlooked fact about
the exchange-traded fund marketplace.
With the huge proliferation of ETFs
in recent years, Losi explained, tax
loss harvesting has gotten a lot easier,
because advisors can more effectively
sell their clients’ holdings as needed and
then pick up a similar-yet-distinct ETF
that will deliver a similar exposure to individual or entity sells or trades secu- of $250 to the cost of the new stock,
what was sold. rities at a loss and within 30 days before $800, to obtain your basis in the new
According to Losi, wealth advisors or after the sale they buy “substantially stock, which is $1,050.”
should study this dynamic and consider identical” securities. Wash sale issues, as The IRS’ second example is more
new and emerging ways to efficiently the SEC explains, can also be triggered if nuanced and considers an individual
enact tax loss harvesting. This is an an investor acquires substantially iden- who is an employee of a corporation
especially important moment to do such tical securities in a fully taxable trade, with an incentive pay plan. Under this
work, Losi explains, as 2022 has been or if they acquire a contract or option plan, the individual is given 10 shares
nothing short of a brutal year for the to buy substantially identical securities. of the corporation’s stock as a bonus
typical investor, with significant losses If an individual sells stock and their award, and they include the fair market
being posted on both sides of the typical spouse or a corporation they control value of the stock in their gross income
60/40 portfolio of stocks and bonds. buys substantially identical stock, this as additional pay. Later, the person sells
Losi noted that, with a substantial would also be deemed a wash sale. these shares at a loss.
degree of tax loss harvesting on the table The full wash sale framework is “If you receive another bonus award
for Q4 2022, it will be important for outlined in the annually updated IRS of substantially identical stock within 30
advisors and their clients to avoid trig- Publication 550, which includes a few days of the sale, you cannot deduct your
gering the wash sale rule. Successfully helpful examples of how an advisor or loss on the sale,” the IRS warns.
doing so requires advisors to keep a client could unwittingly trigger a wash This example shows that wash sale
few fundamental rules in mind, experts sale issue. In one straightforward exam- issues are not always triggered only by
agree, beginning with the fact that the ple, a theoretical individual buys 100 the actions of the advisor or the client,
Internal Revenue Service doesn’t deem shares of X stock for $1,000. Later, the and so it is important to be mindful
a security sale that generates a loss as person sells these shares for $750 and of things like anticipated equity grants
being a true sale if the investor turns within 30 days from the sale they buy or bonuses when considering tax loss
around and buys it back within 30 days. another 100 shares of the same stock harvesting.
for $800.
WASH SALE BASICS “Because you bought substantially GET IT RIGHT
As defined on the Securities and identical stock, you cannot deduct your In a new blog post published recently to
Exchange Commission’s Investor.gov loss of $250 on the sale,” the IRS warns. her firm’s website, Natalie Miller, direc- Adobe Stock
website, a wash sale occurs when an “However, you add the disallowed loss tor of investment strategy at Parametric

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