When Exchange-Traded Fund Sales Wash, Does the IRS Supply Towels?

Since exchange-traded funds like the Standard & Poor's Depositary Receipts (Spiders), the Nasdaq 100 tracking stock QQQ (QQQ Quote) and the lineup of iShares indices from Barclays Global Investors, trade just like stocks, many investors are flipping them more frequently than they would regular mutual funds.

If you're one of these fast-trading investors, you need to be more aware of the infamous wash-sale rule than if you were a buy-and-hold fund owner. The wash-sale rule says that if you sell a security at a loss and buy a "substantially identical" security within 30 days, the loss is disallowed for tax purposes.

So if, for example, you buy Cisco on Monday and sell it at a loss on Tuesday, the wash-sale rule says you can't claim that loss if you buy back Cisco shares within 30 days. ...