Better investing is more than just knowing about the market
trends and the economics behind various sectors and countries.
Savvy exchange traded fund (
) investors can also utilize tax rules to help maintain higher
anyone can implement with ETFs is to to close out positions that
have incurred losses before holding it for a year so that one may
take advantage of short-term capital gains losses,
comments Hans Wagner for Investopedia
. Positions that have performed may then be held for more than a
year, which would reduce tax liability since gains are taxed as
long-term capital gains. [
ETFs and Taxes: Understanding the Differences.
Additionally, for those who are loath to exit a certain sector
but who own a sector ETF that is faltering, one may consider
selling the current ETF and buy a similar ETF that covers the same
area, taking a loss on the original ETF for tax purposes.
The strategy is called
. To do it, you sell a losing position but buy an ETF that holds
that same position, thereby avoiding losing your stake if things
take a turn for the better. By utilizing this strategy, you
maintain your exposure to an area of the market and picks up a
capital loss for tax purposes. [
Not All ETFs Are Taxed Alike.
Although this strategy could be beneficial, a major drawback of
it is the accumulation of transaction costs that go with buying and
selling shares frequently. Secondly, you may find it hard to find
good ETFs that enable you to successfully implement this strategy
while maintaining the exposure to a desired asset class.
For more information on ETFs and taxes, visit our
Max Chen contributed to this article.