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)


Tax Rules for ETF Losses - Fidelity? ›

Capital gain or loss

Do you pay taxes on ETF losses? ›

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 more than one year, the loss is long term.

How to avoid 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.

Does wash rule apply to ETF? ›

Q: Which securities are covered by the wash sale rule? Generally, if a security, such as stocks, exchange-traded funds (ETFs), and mutual funds, has a CUSIP number (a unique nine-character identifier for a security), then it's most likely subject to the wash sale rule.

Do ETFs have different tax consequences than mutual funds? ›

Although similar to mutual funds, equity ETFs are generally more tax-efficient because they tend not to distribute a lot of capital gains.

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

At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.

What is the wash sale rule for 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 is the downside of ETFs? ›

For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.

How are ETF distributions taxed? ›

Not all ETF dividends are taxed the same; they are broken down into qualified and unqualified dividends. Qualified dividends are taxed between 0% and 20%. Unqualified dividends are taxed from 10% to 37%. High earners pay additional tax on dividends, but only if they make a substantial income.

Should you hold ETFs in a taxable account? ›

ETFs can be more tax efficient compared to traditional mutual funds. Generally, holding an ETF in a taxable account will generate less tax liabilities than if you held a similarly structured mutual fund in the same account. From the perspective of the IRS, the tax treatment of ETFs and mutual funds are the same.

What is the 30 day rule for tax loss harvesting? ›

Your loss is disallowed if, within 30 days of selling the investment (either before or after) you or even your spouse invest in something that is identical (the same stock or fund) or, in the IRS' words, “substantially similar” to the one you sold. Internal Revenue Service.

Are wash sale losses gone forever? ›

Don't fret that you'll lose your tax break forever due to the wash-sale rule, however. The ability to claim your loss is only deferred, not eliminated. Simply do not re-buy the asset in the 30-day window, and you can safely claim the loss on your tax return and without any further penalty.

How does the IRS know about wash sales? ›

Note: Wash sales are in scope only if reported on Form 1099-B or on a brokerage or mutual fund statement. Click here for an explanation. A wash sale is the sale of securities at a loss and the acquisition of same (substantially identical) securities within 30 days of sale date (before or after).

Do you pay taxes on investment losses? ›

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).

Can you write off ETF fees? ›

However, like fees on mutual fund, those paid on ETFs are indirectly tax deductible because they reduce the net income flowed through to ETF investors to report on their tax returns. Other non-deductible expenses include: Interest on money borrowed to invest in investments that can only earn capital gains.

Do I need to pay taxes on stocks if I don't sell? ›

The tax doesn't apply to unsold investments or unrealized capital gains. Stock shares will not incur taxes until they are sold, no matter how long the shares are held or how much they increase in value.

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