Wash sale rule + Mutual Funds/ETFs?
I think the IRS doc you want is http://www.irs.gov/publications/p550/ch04.html#en_US_2010_publink100010601 I believe the answers are:
"I wonder if ETF's are further removed from the actual underlying holdings or assets giving value to the fund, as compared to regular mutual funds. Not exactly removed. But slightly different. Whenever a Fund want to launch an ETF, it would buy the underlying shares; create units. Lets say it purchased 10 of A, 20 of B and 25 of C. And created 100 units for price x. As part of listing, the ETF company will keep the purchased shares of A,B,C with a custodian. Only then it is allowed to sell the 100 units into the market. Once created, units are bought or sold like regular stock. In case the demand is huge, more units are created and the underlying shares kept with custodian.  So, for instance, would VTI and Total Stock Market Index Admiral Shares be equally anchored to the underlying shares of the companies within the index? Yes they are. Are they both connected? Yes to an extent. The way Vanguard is managing this is given a Index [Investment Objective]; it is further splitting the common set of assets into different class. Read more at Share Class. The Portfolio & Management gives out the assets per share class. So Vanguard Total Stock Market Index is a common pool that has VTI ETF, Admiral and Investor Share and possibly Institutional share. Is VTI more of a ""derivative""? No it is not a derivative. It is a Mutual Fund." You could use a stock-only ISA and invest in Exchange Traded Funds (ETFs). ETFs are managed mutual funds that trade on open exchanges in the same manner as stocks. This changes the specific fund options you have open to you, but there are so many ETFs at this point that any sector you want to invest in is almost certainly represented. Mutual funds are collections of investments that other people pay to join.  It would be simpler to calculate the value of all these investments at one time each day, and then to deem that any purchases or sales happen at that price.  The fund diversifies rather than magnifies risk, looking to hold rather than enjoy a quick turnaround.  Nobody really needs hourly updated price information for an investment they intend to hold for decades. They quote their prices on a daily basis and you take the daily price.  This makes sense for a vehicle that is a balanced collection of many different assets, most of which will have varying prices over the course a day.  That makes pricing complicated.  This primer explains mutual fund pricing and the requirements of the Investment Company Act of 1940, which mandates daily price reporting.  It also illustrates the complexity: How does the fund pricing process work? Mutual fund pricing is an intensive process that takes place in a short time frame at the end of the day. Generally, a fund’s pricing process begins at the close of the New York Stock Exchange, normally 4 p.m. Eastern time. The fund’s accounting agent, which may be an affiliated entity such as the fund’s adviser, or a third-party servicer such as the fund’s administrator or custodian bank, is usually responsible for calculating the share price. The accounting agent obtains prices for the fund’s securities from pricing services and directly from brokers. Pricing services collect securities prices from exchanges, brokers, and other sources and then transmit them to the fund’s accounting agent. Fund accounting agents internally validate the prices received by subjecting them to various control procedures. For example, depending on the nature and extent of its holdings, a fund may use one or more pricing services to ensure accuracy. Note that under Rule 22c-1 forward pricing, fund shareholders receive the next daily price, not the last daily price.  Forward pricing makes sense if you want shareholders to get the most accurate sale or purchase price, but not if you want purchasers and sellers to be able to make precise calculations about gains and losses (how can you be precise if the price won't be known until after you buy or sell?). There are times when investing in an ETF is more convenient than a mutual fund. When you invest in a mutual fund, you often have an account directly with the mutual fund company, or you have an account with a mutual fund broker.  Mutual funds often have either a front end or back end load, which essentially gives you a penalty for jumping in and out of funds. ETFs are traded exactly like stocks, so there is inherently no load when buying or selling.  If you have a brokerage account and you want to move funds from a stock to a mutual fund, an ETF might be more convenient. With some accounts, an ETF allows you to invest in a fund that you would not be able to invest in otherwise.  For example, you might have a 401k account through your employer.  You might want to invest in a Vanguard mutual fund, but Vanguard funds are not available with your 401k.  If you have access to a brokerage account inside your 401k, you can invest in the Vanguard fund through the associated ETF. Another reason that you might choose an ETF over a mutual fund is if you want to try to short the fund. ETFs don't need sell-side research (yes they do, no they don't).  They need to keep their fees minimal.  Mutual funds need equity research and they charge beefy fees to pay for it.  Look at the flows into mutual funds and the flows into ETFs and make your own mind up.  However, bear in mind that there will always be *some* demand for really good research.  It just probably isn't a growing field.  It will be a shrinking field where the best of the best do well and everyone else is playing a game of Survivor trying not to get kicked off the island. Taxes  Based on the numbers you quoted (-$360) it doesn't appear that you would have a taxable event if you sell all the shares in the account.  If you only sell some of the shares, to fund the new account, you should specify which shares you want to sell. If you sell only the shares that you bought when share prices were high, then every share you sell could be considered a loss. This will increase your losses. These losses can be deducted from your taxes, though there are limits. Fees Make sure that you understand the fee structure. Some fund families look at the balance of all your accounts to determine your fee level, others treat each fund separately.  Procedure If you were able to get the 10K into the new account in the next few months I would advise not selling the shares. Because it will be 6 to 18 months before you are able to contribute the new funds then rebalancing by selling shares makes more sense. It gets you to your goal quicker.  All the funds you mentioned have low expense ratios, I wouldn't move funds just to chase a the lowest expense ratio. I would look at the steps necessary to get the mix you want in the next few weeks, and then what will be needed moving forward. If the 60/40 or 40/60 split makes you comfortable pick one of them. If you want to be able to control the balance via rebalancing or changing your contribution percentage, then go with two funds. "You said your strategy was to put it into a index fund.  But then you asked about setting  stock limits.   I'm confused. Funds usually trade at their price at the end of the day, so you shouldn't try to time this at all. Just place your order. If you are buying ETFs, there is going to be so much volume on the market that your small trade is going to have no impact on the price. You should just place a market order. A market order is an order to buy or   sell a stock at the current market   price. A limit order is an order to buy or   sell a security at a specific price. In the US, when you place a trade with any broker, you can either place a limit order or a market order.  A market order just fills your order with the next best sellers in line.  If you place an order for 100 shares, the sellers willing to sell 100 shares at the lowest price will be matched with your order (sometimes you may get 50 shares at one price and 50 shares at a slightly different price).    If your stock has a lot of volatility and you place a market order for a small amount of shares,  you will get the best price. If you place a limit order, you specify the price at which you want to buy shares.  Your order will then only be filled with sellers willing to sell at that price or lower (i.e. they must be at least as good as you specified).  This means you could place an order at a limit that does not get filled (the stock could move in a direction away from your limit price).  If you really want to own the stock, you shouldn't use a limit order.  You shouldn't only use a limit order if you want to tell your broker ""I will only buy this stock at this price or better.""  p.s. Every day that passes is NOT a waste.  It's just a day that you've decided investing in cash is safer than investing in the market." "This answer is about the USA. Each time you sell a security (a stock or a bond) or some other asset, you are expected to pay tax on the net gain. It doesn't matter whether you use a broker or mutual fund to make the sale. You still owe the tax. Net capital gain is defined this way: Gross sale prices less (broker fees for selling + cost of buying the asset) The cost of buying the asset is called the ""basis price.""  You, or your broker, needs to keep track of the basis price for each share. This is easy when you're just getting started investing. It stays easy if you're careful about your record keeping.  You owe the capital gains tax whenever you sell an asset, whether or not you reinvest the proceeds in something else. If your capital gains are modest, you can pay all the taxes at the end of the year. If they are larger -- for example if they exceed your wage earnings -- you should pay quarterly estimated tax. The tax authorities ding you for a penalty if you wait to pay five- or six-figure tax bills without paying quarterly estimates.  You pay NET capital gains tax. If one asset loses money and another makes money, you pay on your gains minus your losses. If you have more losses than gains in a particular year, you can carry forward up to $3,000 (I think). You can't carry forward tens of thousands in capital losses.  Long term and short term gains are treated separately. IRS Schedule B has places to plug in all those numbers, and the tax programs (Turbo etc) do too. Dividend payments are also taxable when they are paid. Those aren't capital gains. They go on Schedule D along with interest payments. The same is true for a mutual fund. If the fund has Ford shares in it, and Ford pays $0.70 per share in March, that's a dividend payment. If the fund managers decide to sell Ford and buy Tesla in June,  the selling of Ford shares will be a cap-gains taxable event for you.  The good news: the mutual fund managers send you a statement sometime in February or March of each year telling what you should put on your tax forms.  This is great. They add it all up for you. They give you a nice consolidated tax statement covering everything: dividends, their buying and selling activity on your behalf, and any selling they did when you withdrew money from the fund for any purpose.   Some investment accounts like 401(k) accounts are tax free. You don't pay any tax on those accounts -- capital gains, dividends, interest -- until you withdraw the money to live on after you retire. Then that money is taxed as if it were wage income. If you want an easy and fairly reliable way to invest, and don't want to do a lot of tax-form scrambling, choose a couple of different mutual funds, put money into them, and leave it there. They'll send you consolidated tax statements once a year. Download them into your tax program and you're done. You mentioned ""riding out bad times in cash.""  No, no, NOT a good idea. That investment strategy almost guarantees you will sell when the market is going down and buy when it's going up. That's ""sell low, buy high."" It's a loser. Not even Warren Buffett can call the top of the market and the bottom.  Ned Johnson (Fidelity's founder) DEFINITELY can't."