Once you sell or partially sell an ETF, you lose the advantage of any accumulated tax losses.
Don't forget that a loss on an ETF or any gross roll up fund is available against itself so in the event of a partial withdrawal you do not lose the advantage of a tax loss per se.
Lets say I put 100k in Anglo Irish bank shares in 2007 and 100k into an MSCI World Index Tracker ETF.
Roll onto the spring of 2009 what is my position?
My Anglo Irish Shares are totally worthless and I have a 100k Capital Gains Tax loss and my ETF is down about 40% worth about 60k.
Ouch, that hurt. But here's the first point. Whilst the Anglo "investment" is worth nothing at all, at least the more diversified ETF has maintained some value.
So, first point irrespective of taxation, ETFs are better investments than gambling on individual stocks since a well diversified ETF cannot result in zero value.
Let's say I needed to make a partial withdrawal. Well, second point whenever investing long term it is essential to first address short term capital requirements by creating an adequate emergency fund. A prudent investor will therefore always ensure that they have sufficient funds available to meet their short term needs.
But Lets say that we need €30k.
Obviously we can't take it from selling Anglo Shares so we surrender half of our unit holding in the ETF.
Roll the clock onto today and what is the situation?
Well the low price for the I shares MSCI World World ETF was 11.72 and the close on Friday was 22.37 so even if we had sold on the absolute worst possible day in the Spring of 2009 the remaining investment would still have doubled.
We now have an investment with a base cost of 50k (remember we invested 100k and sold half our position) which is worth around 60k after making a partial withdrawal of 30k.
What is the tax position? Well we had dividends of about €2000pa which were gross roll up so we didn't pay any income tax on these saving around €1000pa depending on our personal rate of income tax.
What is the tax position on realising our investment today?
Well with a base cost of 50k and a value of 60k we would have a gain of about 10k and an exit tax liability of currently €3,600 - roughly in line with the income tax we probably saved on the dividends.
Finally, let's say we inherited 1m today what should we do?
Well, hopefully we have learnt some lessons in the last few years.
Have a good financial plan and an investment policy statement which sets out where you are and where you are trying to get to. Hopefully, we learnt the difference between gambling, speculating and investing.
We need to have an adequate emergency fund, make a will, ensure you have adequate risk insurance life cover, income protection, other relevant insurance for your circumstances, adequately fund for your retirement, ensure your portfolio is properly diversified across multiple asset classes (stocks, bonds, cash and real estate) ignore the bloke in the pub, a well meaning relative and your man on the telly telling you that this time its different and you need to prepare for the end of the world by loading up on tinned goods and an M16 assult rifle and instead pay for comprehensive financial planning advice which is obtained by paying a fee not commission.
When we have done all those things properly, we will talk about Capital Gains tax loss harvesting strategies and how we can use the 100k CGT loss as part of a prudent financial plan.
But never, ever let the tax tail wag the investment dog.