Accounting

How ETFs circumvent IRS wash-sale rules

Published

2 years ago

December 31, 2024

Institutional investors are harvesting ETF losses for tax purposes, then placing their assets in highly correlated funds — regardless of so-called wash-sale restrictions, a new study found.

In theory, IRS guidelines prohibit investors from buying “substantially identical” securities 30 days before or after selling them.

In practice, fund managers, pensions, insurance firms, endowments and other institutional investors “engage in substantial swapping” of ETFs with holdings that are 99% or more the same thing to the tune of $417 billion in assets since 2001 and $106 billion in 2022 in transactions that “seem to lack economic substance beyond harvesting capital losses,” according to a working academic paper released this summer and revised last month by four professors of business and management. The findings, which echo those of another working paper from earlier this year, shed more light on how ETFs help financial advisors and their clients offset the taxes on capital gains by booking losses in their portfolios.

“While the economic intent of the wash sale rule is straightforward, significant uncertainty remains as to the permissibility of tax deductions achieved through ETF swaps,” the report’s authors — Michael Dambra of the University of Buffalo and Andrew Glover, Charles M.C. Lee and Phillip Quinn of the University of Washington — wrote in the introduction. “Specifically, the IRS has not ruled on what constitutes a ‘substantially identical’ security, leaving financial advisors to navigate a foggy legal landscape. Some advisors seem to take the regulatory silence as tacit permission to swap ETFs that hold identical securities or that are even benchmarked to the same index (e.g., Lasser 2011). Others argue that if an investor’s economic position has not changed after swapping ETFs, the spirit of the wash sale rule has likely been violated (e.g., Fischer 2010). Against this backdrop of legal uncertainty, the extent to which investors engage in tax avoidance through ETF wash sales remains largely unknown.”

Representatives for the SEC declined to comment on the report’s conclusions and referred questions to the IRS, which didn’t provide a response.

The findings essentially “confirmed what all of us expected,” but “what was striking about the study was being able to demonstrate that the loss harvesting was material enough to be measured,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, a nonpartisan think tank.

Tax strategies around possible wash sales have been “going on for decades and decades and decades,” he noted. The rise of ETFs — which topped $10 trillion in assets for the first time in September in a shift fueled by technology, lower fees and tax advantages — has altered the picture. But it’s not clear whether IRS policymakers or members of Congress will try to rein in the wash-sale practices documented in the report.

“I don’t think they view this as high on their agenda, because there’s other tax evasion that goes on. This is lawful, and the question is whether it’s pushing the limits,” Rosenthal said in an interview. “It’s just easier now. There are more vehicles, there are more opportunities, there is more technology to help plan and there are more people marketing these strategies as a result of the ease.”

The study hasn’t been published by a peer-reviewed journal, and the researchers listed some possible “sources of noise” in the data they tracked from quarterly SEC filings of firms’ holdings known as Form 13F and granular trading records from financial technology firm AbelNoser Solutions, a Trading Technologies company. Some swap trades of correlated ETFs could have occurred at random, between the quarterly filings, at lower than 99% matches in their holdings or at an even greater volume when considering the growth of ETFs, the authors wrote.

“Exchange-traded funds provide an efficient way for investors to circumvent the trading frictions associated with the wash sale rule,” Dambra and the other academics wrote. “Specifically, investors can sell a depreciated ETF security and realize a capital loss while simultaneously purchasing another ‘nearly identical’ ETF security. This form of swap trading allows investors to maintain a substantively identical economic position while harvesting a capital loss that can be used to offset realized gains and other taxable income. With an explosion in available ETFs over the past two decades, these securities have become ideal vehicles for circumventing the wash sale rule.”

Their research suggests that ETFs can offer even greater tax efficiency than many experts have pointed out in the past — or that the IRS may be ignoring the enforcement of a rule that has restricted loss harvesting maneuvers for more than a century.

“The expansion of ETFs has provided investors with a new, low-cost tool whereby capital losses can be realized without disturbing an optimal portfolio,” the authors wrote. “Similar to the findings in Li (2024), we find the introduction of a near-identical ETF leads to more volume activity for the incumbent ETF. Next, we find that tax-sensitive institutions hold a more diverse set of highly correlated ETFs, invest a larger portion of their AUM in these ETFs, engage in more swapping between near-identical ETFs and capture more capital losses with this swapping activity. We estimate conservatively that capital loss recognition attributable to annual swapping among tax-sensitive institutional investors is in the tens of billions of dollars. While this behavior is becoming increasingly widespread and economically important, regulators have remained silent on where ETFs fit in their definition of ‘substantially identical securities.’ We contribute to the policy discussion on the potential costs of that continued silence.”

Accounting

Continuous Auditing Transforms Corporate ERPs

Published

5 days ago

July 21, 2026

Business Finance News

continuous auditing transforms corporate erps

As corporate accounting departments cross the threshold into late July 2026, the adoption of continuous, automated auditing systems has reached a definitive turning point. Driven by advances in artificial intelligence and deep integration with modern Enterprise Resource Planning (ERP) platforms, leading finance organizations are moving away from traditional, periodic post-hoc audits in favor of real-time, 100% transactional verification. This technological transition is redefining internal control environments, reducing compliance costs, and eliminating the structural delays inherent in legacy quarterly closing processes.

Unlike traditional auditing frameworks that rely on statistical sampling—a process that inevitably leaves operational blind spots—continuous auditing software monitors operational data feeds continuously. Every purchase order, electronic invoice, payroll disbursement, and cross-border wire transfer is automatically cross-referenced against established corporate governance parameters, regulatory tax schedules, and anti-fraud algorithms in real time. Anomalies or unauthorized ledger entries are flagged instantly, allowing internal audit teams to investigate and remediate compliance gaps immediately rather than months after the close of a financial period.

The implications for executive financial management are far-reaching. By embedding continuous verification directly into daily transaction workflows, chief financial officers gain uninterrupted visibility into the organization’s true financial standing. Real-time balance sheet auditing eliminates the severe operational bottlenecks associated with month-end and quarter-end financial reconciliations, freeing accounting professionals to focus on strategic financial modeling, tax planning, and capital allocation rather than manual data entry and spreadsheet consolidation.

However, implementing continuous auditing requires accounting leadership to invest heavily in data governance and technical upskilling. Internal audit teams must evolve from manual ledger reviewers into system architects capable of auditing complex algorithms and validating automated data pipelines. Accounting firms and corporate controllers that master continuous auditing will establish a resilient compliance framework capable of meeting stringent international regulatory standards with total transparency.

Accounting

U.S. Imposes New 50% Tariffs on Canadian Imports Under Rare Legal Provision

Published

6 days ago

July 20, 2026

Business Finance News

U.S. Imposes New 50% Tariffs on Canadian Imports Under Rare Legal Provision

WASHINGTON — In a major escalation of cross-border trade friction, U.S. President Donald Trump has signed executive orders imposing new 50% tariffs on a wide selection of Canadian exports, citing discriminatory practices by Ottawa targeting American auto, dairy, and beverage industries.

The new duties, announced Monday, will take effect in 30 days. They target a broad spectrum of consumer and industrial goods—ranging from wine, liquor, and milk products to commercial cement, furniture, clothing, and hockey equipment.

Untested Legal Mechanism

To enact the sweeping measures, the administration invoked Section 338 of the Tariff Act of 1930—a rarely used legal provision allowing the executive branch to levy additional tariffs of up to 50% on foreign nations deemed to discriminate against U.S. commerce.

White House officials noted that Section 338 addresses trade discrimination rather than national security or economic emergencies. The move comes months after prior global emergency tariffs faced legal challenges in domestic courts, signaling Washington’s pivot toward alternate statutory authorities to maintain import duties.

Senior administration officials briefed reporters that the measure directly responds to Canadian provincial bans on U.S. alcohol, restrictions on American vehicle exports, and import quota disparities affecting U.S. dairy and cheese producers relative to third-party trading partners.

“While the administration continues to secure reciprocal trade agreements globally, Canada retaliated against efforts to protect domestic industry,” U.S. Trade Representative Jamieson Greer stated.

USMCA Impact and Carve-Outs

Significantly, the newly ordered 50% duties will apply to designated items even if they otherwise comply with the United States-Mexico-Canada Agreement (USMCA).

However, the administration confirmed key targeted exemptions:

Energy products (including oil and natural gas)
Potash and critical minerals
Fish and seafood
Goods already governed by sector-specific duties (such as existing steel and aluminum tariffs)

Administration representatives emphasized that the tariffs do not stem from recent disputes concerning drifting Canadian wildfire smoke, noting that policy options regarding environmental spillover remain under separate review.

Canadian Response and Market Reaction

Following the White House announcement, the Canadian dollar experienced a sharp decline against the U.S. dollar, falling approximately 0.4% during evening trading.

Canadian Prime Minister Mark Carney issued a statement emphasizing that Canada’s earlier counter-duties had merely matched previous U.S. trade actions. “Canada stands ready to engage intensively to address outstanding issues with the U.S. to the mutual benefit of our citizens,” Carney stated, pointing to detailed proposals Ottawa submitted to modernize the USMCA framework.

Ontario Premier Doug Ford took a firmer stance, urging a “dollar-for-dollar” reciprocal response if the measures go into effect on August 19.

With a 30-day implementation window before the duties officially lock in, industry associations and trade groups on both sides of the border are calling for urgent bilateral negotiations to avert further supply chain disruption across North America.

Accounting

Automated Continuous Auditing: Transforming Compliance and Real-Time Financial Oversight

Published

6 days ago

July 20, 2026

Business Finance News

Transforming Compliance and Real-Time Financial Oversight

The traditional accounting paradigm—defined by periodic monthly closures and post-hoc annual audits—is rapidly giving way to continuous, automated financial oversight. As of July 2026, forward-thinking accounting practices and multinational corporate finance departments are leveraging continuous auditing systems powered by advanced machine learning models. These systems monitor operational transactions in real time, shifting audit methodologies from sample-based post-analysis to absolute, 100% transaction-level verification.

The operational advantages of continuous auditing are transformative. Standard auditing procedures historically relied on statistical sampling, which, despite rigorous methodology, inherently left gaps where anomalies or fraudulent transactions could go undetected for months. Modern continuous auditing platforms integrate directly with enterprise resource planning (ERP) databases, instantly cross-referencing purchase orders, invoices, bank feeds, and tax records. Any deviation from established control parameters or unusual transaction behavior triggers immediate flags for internal audit teams, dramatically reducing detection lag from quarters to seconds.

Beyond fraud prevention, continuous auditing fundamentally alters internal reporting and decision-making. Executive leadership no longer has to wait weeks after the close of a quarter to evaluate precise financial standing; real-time verified ledger data provides an uninterrupted view of operating margins, tax liabilities, and cash flow dynamics. This real-time visibility enables corporate controllers to adjust capital allocation strategies dynamically, mitigating liquidity constraints and capitalizing on emerging commercial opportunities far more efficiently than competitors bound to legacy reporting cycles.

However, implementing continuous auditing requires accounting professionals to acquire new analytical capabilities. The role of the auditor is evolving from manual data reconciliation toward system validation, algorithmic model governance, and strategic risk interpretation. Accounting firms and corporate finance departments must invest in continuous technical education, ensuring that audit staff possess the data engineering skills necessary to design, maintain, and evaluate complex automated compliance systems.