How does the irs define substantially identical security? If I buy a high yield etf then sell it to buy a high yield etf with another stock as the underlying asset, are those too similar since they are bith dividend etfs or are they different since they sre different sectors?

The IRS defines "substantially identical" securities as those that are sufficiently similar in terms of their economic characteristics, risks, and rewards. The determination of whether two securities are substantially identical is not always clear-cut and often relies on the specific facts and circumstances of each case. The IRS has provided some guidance on what factors may be considered when determining substantial identity, including:

1. **Economic Characteristics**: Securities that have similar economic characteristics, such as the right to receive dividends, interest, or income, may be considered substantially identical.
2. **Risk and Reward**: Securities that have similar risk profiles and potential returns, such as stocks with similar volatility or bond with similar credit ratings, may be deemed substantially identical.
3. **Industry and Sector**: Securities that are within the same industry or sector may be more likely to be considered substantially identical, but this is not a definitive factor.
4. **Issuer**: Securities issued by the same company or entity may be more likely to be considered substantially identical, but this again depends on the specific circumstances.

In the case of ETFs, the underlying assets and the ETFs themselves may be considered substantially identical if they have similar investment objectives, strategies, and risk profiles. For example, two ETFs that invest in high-yield bonds may be considered substantially identical if they have similar investment policies, track similar indices, and have similar expense ratios and dividend distributions.

In your scenario, if you buy a high-yield ETF and then sell it to buy another high-yield ETF with a different underlying asset, the two ETFs themselves may be considered substantially identical if they have similar investment characteristics, risk profiles, and dividend distributions. However, if the ETFs invest in different sectors or have significantly different investment strategies, they may not be considered substantially identical.

It's important to note that the IRS has not provided a definitive definition of "substantially identical," and the determination ultimately rests with the IRS. In cases of uncertainty, it's advisable to consult with a tax professional or the IRS directly to ensure compliance with tax laws.