Case Study: Locking in Tax Savings

Case Summary

Jane and John have experienced significant declines in their portfolio over the past year and want to lock in capital losses now to offset future gains.  They anticipate a market upturn at some point in the near future, so they don’t want to be out of the market.  At the same time, they want to avoid any problems with the “wash-sale” rule that discourages the sale and repurchase of a similar security within a 30-day period.


Investors seeking to lock in tax-losses while maintaining market exposure and compliance with tax rules should consider ETFs that are correlated to the securities they are selling.

Each asset class has several choices of ETFs that could effectively provide market exposure during the 30 day waiting period.

Most equities will correlate to a broad-based equity ETF or one that specializes by style or market cap. Fixed income ETFs provide exposure to corporate, US Treasury and municipal bonds.  Other asset classes with ETF representation include currencies, commodities, precious metals and real estate.

Portfolio Recommendations

For exposure to broad equity markets, Jane and John should consider the SPDR S&P 500 (SPY) or iShares S&P 500 ETF (IVV).  If they are selling a small cap stock, they would do better to maintain market exposure with a small-cap ETF such as the Russell 2000 Index Fund (IWM) which tracks an index of the smallest 2000 companies in the Russell 3000 index.

If Jane and John are selling a combination of government and corporate bonds, market exposure can be maintained with one of the large, broad based bond ETFs such as the Barclays Capital Aggregate Bond Fund (AGG).

Broad-based commodity exposure is available through the DB Commodity Index Tracking Fund (DBC) with holdings in aluminum, corn, gold and oil.