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Seems like wash rule doesn't apply for a similar - but not identical - security. Like maybe Vanguard Total Stock ETF vs SPDR Total Stock ETF. Suppose I buy 5 to 10 sector ETFs. Maybe I make it so they sum up to the total market anyway. At year end, whichever sector ETFs are down, I sell at a loss while simultaneously rotating it to a same sector ETF by a different firm. That way I can claim losses are short-term and reduce tax liability at my marginal rate (surely greater than 15%). On the other hand, for the ETFs that are up, I keep as-is until I'm ready to cash-in. In that case, the tax liability will be fixed at long-term 15%. So this always beats just buying a single total stock ETF? - other than the management required. Does that work out in theory? Is it worth it in practice?

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  • $\begingroup$ I am not a tax lawyer. But the law may not be as clear cut as you believe. Some financial advisors agree with your interpretation. Others say, to be on the safe side you should buy an ETF with at least one difference compared to the ETF you sold (for example sell a large cap financial sector ETF and buy a financial sector ETF that includes some small caps) so you have some excuse if the IRS questions it as a wash sale. The law refers to buying and selling "substantially identical securities" but no one has defined what substantially identical means. $\endgroup$ – noob2 Feb 14 at 20:49
  • $\begingroup$ Still, it may be interesting to run some simulations to see how much you could save on taxes if you did this. Do different sectors move sufficiently differently from each other to create some opportunities? In a year like 2019 (S&P up in the double digits) do any sectors have losses? An interesting research project or term paper. $\endgroup$ – noob2 Feb 15 at 16:33

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