Consider the question as to whether an ETF is a "contract or option to acquire a stock." If the answer is yes, meaning ETFs are construed as options to acquire specific stocks, a connection must exist between these two securities; in this instance, the stock sold to harvest the losses and the ETF purchased within the disallowed period. In order to circumvent the rule of wash-sale, the investor in the example above targets ETFs that must contain, among other stocks, a specifically desired stock. For example, Pfizer common stock accounts for 14.10% of the Select Sector SPDR Health Care (XLV).
If an investor sells Pfizer stock and uses the proceeds to purchase XLV, the transaction could be interpreted as a "contract" to repurchase 14.10% of Pfizer back. From this perspective, although Pfizer and XLV are not exactly and "substantially identical," they are at least "14.10% identical." It's possible that under Section 1091(b), the investor will then be denied only 14.10% of the loss, with the remaining 85.90% of the loss being recognized. This opportunity would have been completely lost, on the other hand, had the investor bought Merck instead of XLV.
It now can be seen that an ETF is such a hybrid product that it does not meet the requirement of "substantially identical," but is a contract to acquire a stock. If this argument is true, the IRS could treat an ETF as a "partially identical" security in which only the buy-back portion of the loss would be denied.
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