Is selling QQQ and buying TQQQ considered a wash sale?

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ill
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Is selling QQQ and buying TQQQ considered a wash sale?

Post by ill »

Is selling QQQ and buying TQQQ considered a wash sale?

TQQQ holds futures contracts and the QQQ holds actual securities. So I would think that these are not identical.
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nisiprius
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by nisiprius »

PicassoSparks wrote: Sat May 14, 2022 5:51 am https://www.portfoliovisualizer.com/bac ... sisResults

Looks like you’re safe.
You may have meant

https://www.portfoliovisualizer.com/fun ... mbols=TQQQ

To link to a PortfolioVisualizer result, you need to copy the link labelled "Link" after "fund information." The URL in the URL bar doesn't work.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by happysteward »

Watching this thread with intellectual interest…they do have the same benchmark….are they NOT substantially identical?….seems they may be…

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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by nisiprius »

The answer is "nobody really knows."

Here's a good article: Wash sale challenge: what is "substantially identical?"

I assume you have an investment rationale for this, it isn't just a tax maneuver. I am guessing the rationale is "buying the dip." Instead of using cash to buy 1X QQQ--QQQ itself--you are using QQQ, which is down -24% YTD, to buy TQQQ, which is down -63% YTD.

I'm not a tax expert and this is not tax advice.

According to the Morningstar article, "The law’s purpose was to prevent taxpayers from recognizing losses without any actual change in economic position."

If you replace QQQ with TQQQ, that part of your portfolio suddenly becomes three times as volatile. Is that a change in economic position? I don't know.

You are proposing to take a genuine risk, probably because you wish to exploit an opportunity and hope to make more money when/if QQQ recovers. There could be a long list of legitimate reasons for selling QQQ and buying TQQQ other than saving on taxes. It has a real investment rationale and isn't a pure tax maneuver.

Also, the two ETFs are from different providers. Historically they have not behaved identically and are not intended to behave identically.
Last edited by nisiprius on Sat May 14, 2022 7:54 am, edited 4 times in total.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by nisiprius »

happysteward wrote: Sat May 14, 2022 6:25 am Watching this thread with intellectual interest…they do have the same benchmark….are they NOT substantially identical?….seems they may be…
Observations. (Not tax advice!).

The NASDAQ-100 is the target for QQQ. It is not the target for TQQQ. It is the target which TQQQ hopes to triple every day.

When I check the daily holdings list I count 102 equity holdings... but there is also a ton of other stuff, Treasury bills and swap contracts, that create the effective leverage--none of which are held in QQQ. I see 127 holdings, total.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by nisiprius »

Further observations: I hope you are aware of some facts that should be in the back of anyone's mind when they invest in TQQQ.

Using daily data for total return, a QQQ investor would have experienced a -82.97% drawdown from 3/27/2000 to 10/7/2002. If they had invested $10,000 they would have had less than $2,000.

Today, QQQ is -24% down from its top.

On 4/3/2000, QQQ was also down -24% from its previous top. If they had invested in QQQ on 4/3/2000, despite buying the dip, they would still have experienced a -77% drawdown. If they had invested $10,000, on 10/7/2002 they would have had less than $2,500.

After a -24% plunge, there was still another -77% to go. (That's now the math works. A -24% plunge means 76% of your money left. Another -77% plunge means 23% of that money left. 23% of 76% = 17%, which is the same as a -83% loss overall).

Just being down -24% was not any protection against a huge further loss. Sure, it's better to have ¼ of your money left than to have ⅕ of your money left. But...

Have you ever personally experienced the loss of ¾ of your investment?

And that's just QQQ. You are talking about triple-leveraged QQQ.

So what would a triple-leveraged ETF do when the underlying investment is cut in 4? If you were using actual leverage, you'd be below zero. With a 3X daily-rebalanced ETF, you would never go below zero, but the results would be very ugly.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by rkhusky »

happysteward wrote: Sat May 14, 2022 6:25 am Watching this thread with intellectual interest…they do have the same benchmark….are they NOT substantially identical?….seems they may be…
Benchmarks are not indicative of wash sales. Many funds, for example, use the S&P 500 as a benchmark, even when they are not trying to match the S&P 500 holdings. Often they want to outperform the S&P 500.

If two index funds follow the same index ( i.e. match the holdings of the index) they are likely to be substantially identical, but not always.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by MotoTrojan »

No, but that doesn't change the fact that this is a terrible idea.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by ChinchillaWhiplash »

Just swap QQQ for TECL and there is no issue with wash sale :beer
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by happysteward »

nisiprius wrote: Sat May 14, 2022 7:26 am
The NASDAQ-100 is the target for QQQ. It is not the target for TQQQ. It is the target which TQQQ hopes to triple every day.

When I check the daily holdings list I count 102 equity holdings... but there is also a ton of other stuff, Treasury bills and swap contracts, that create the effective leverage--none of which are held in QQQ. I see 127 holdings, total.
Thanks nisi ! This helps
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happysteward
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by happysteward »

rkhusky wrote: Sat May 14, 2022 8:18 am
Benchmarks are not indicative of wash sales. Many funds, for example, use the S&P 500 as a benchmark, even when they are not trying to match the S&P 500 holdings. Often they want to outperform the S&P 500.
Very helpful rkhusky thanks
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by alex_686 »

I have done this stuff professionally, as such I consider myself - and I will admit I am a bit arrogant about this - a expect is this very grey subject. But this does have me baffled.
PicassoSparks wrote: Sat May 14, 2022 5:51 am Looks like you’re safe.
Nope. I mean it is suggestive to a lay person, but when working with the IRS auditors they wouldn't care about this stuff. What they care about is the actual underling assets. Besides, 3x leverage fund tracks the underlying index pretty well for short periods of 30 days.
rkhusky wrote: Sat May 14, 2022 8:18 am
happysteward wrote: Sat May 14, 2022 6:25 am Watching this thread with intellectual interest…they do have the same benchmark….are they NOT substantially identical?….seems they may be…
Benchmarks are not indicative of wash sales. Many funds, for example, use the S&P 500 as a benchmark, even when they are not trying to match the S&P 500 holdings. Often they want to outperform the S&P 500.

If two index funds follow the same index ( i.e. match the holdings of the index) they are likely to be substantially identical, but not always.
This is closer to the mark but I don't think this is the correct answer.

On the day of the exchange, 1/3 of TQQQ's assets matches QQQ. Thus 1/3 of TQQQ would be a wash sale and the rest would not.

That it is leveraged does not matter. This I am confident of. I have had to work with either baskets of securities on one side and futures on the other. The rulings are clear here.

I can't think of any technical reasons that the portfolio will be varying in the future would matter. If fact, I can point to some examples where it has been denied. Now, these examples were abusive, they were not a independent fund (the people has indirect control of portfolio selection), etc.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by nisiprius »

alex_686 wrote: Sat May 14, 2022 12:14 pm...On the day of the exchange, 1/3 of TQQQ's assets matches QQQ. Thus 1/3 of TQQQ would be a wash sale and the rest would not...
That makes sense.

(Double-take)

Wait, wait. Wouldn't that mean that 83% of an exchange between VOO (S&P 500) for MGC (Vanguard Mega Cap) would be considered a wash sale?

Image

The Morningstar article compares the top twenty holdings of two S&P 500 index funds and the DFA Large-Cap Equity Fund, and opines:
In this example, the three funds differ by at most two securities. It would be hard to argue that the holdings were not substantially identical. However, the Vanguard and the T. Rowe Price funds are both index funds based on the S&P 500 index. The DFA fund is not a “pure” index fund, and its benchmark is the Russell 1000 Index. It would appear safe to assume that the DFA fund is not substantially identical to the other two funds.
Nonsense?
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Re: Is selling QQQ and buying TQQQ considered a wash sale?

Post by rkhusky »

alex_686 wrote: Sat May 14, 2022 12:14 pm On the day of the exchange, 1/3 of TQQQ's assets matches QQQ. Thus 1/3 of TQQQ would be a wash sale and the rest would not.
If you are selling shares of TQQQ, you are not selling shares of QQQ, even if it makes up 1/3 of TQQQ. No wash sale.

If you sell Apple for a loss, you don't have to worry if Total Market bought shares of Apple in the last 30 days. And you don't have to worry that you bought Total Market in the last 30 days. No wash sale.
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