The wash sale rule can disallow a capital loss you thought you locked in for tax purposes. In plain terms: if you sell a security at a loss and buy a substantially identical security within 30 days before or after that sale, the IRS may disallow the loss for now and adjust the basis of the new shares instead.
Harvesting context: Tax-loss harvesting basics. Gain types: Capital gains basics. Lot clocks and short vs long term: Holding periods. Where this usually matters: a taxable brokerage account at Fidelity, Vanguard, Schwab, or E*TRADE—not as an annual game inside a 401(k).
The 61-day window in practice
Count 30 days before the sale, the sale date, and 30 days after. Buying the same ETF the week before you “harvest,” or buying it back 20 days later, can trigger a wash sale.
| Move | Wash-sale risk |
|---|---|
| Sell Fund A at a loss; buy Fund A again inside the window | High—same security |
| Sell Fund A; buy a different fund that tracks a very similar index | Gray—depends on whether the IRS treats them as substantially identical; many investors pick a clearly different fund |
| Sell Fund A in taxable; buy Fund A inside your IRA within the window | Classic trap—loss can be disallowed and basis adjustment may not help the way people hope |
| Dividend reinvestment (DRIP) buying Fund A right after you sold Fund A for a loss | Can create small wash sales on the reinvested shares |
Leftover losses that survive wash-sale adjustments may still feed capital loss carryforwards once properly allowed.
What “substantially identical” usually means (orientation)
- Same stock or same ETF/fund share class: treat as identical.
- Options or contracts that are economically the same as the shares you sold can also matter.
- Two broad U.S. equity ETFs from different sponsors are often used as replacements in harvesting programs, but that is not a free pass—read current IRS Publication 550 language and ask a tax pro when the funds are near clones.
Broker 1099-B forms may flag wash sales they can see inside that broker. They may miss a repurchase in another account (spouse, IRA, second broker). Your Form 8949 still needs to be right (Filing taxes for beginners).
Worked example
Jordan holds 100 shares of a total-market ETF in a Schwab taxable account. Cost basis: $10,000. Value at sale: $8,500. Jordan sells for an apparent $1,500 loss on March 10, planning to harvest.
On March 25, Jordan buys the same ETF back (100 shares) because the market bounced. That repurchase sits inside the 30-day-after window.
Result (educational pattern): the $1,500 loss is disallowed as a current deduction. The disallowed loss typically adds to the basis of the new shares, so Jordan may recover the tax benefit later when those shares are sold in a non-wash way. If instead Jordan had bought the same ETF inside a traditional IRA on March 25, many practitioners warn the loss can be disallowed without a useful basis bump in the IRA—confirm with a tax professional before you mix taxable harvests and IRA buys.
Jordan’s cleaner harvest would have been: sell ETF A, buy a different broad U.S. fund B for 31+ days (or permanently), and leave ETF A alone across taxable and IRA accounts for the full window.
Practical habits that reduce wash-sale mess
- Turn off DRIP on lots you plan to sell for a loss.
- Check all household accounts you control, including IRAs and a spouse’s taxable account if filing jointly and sharing strategy.
- Prefer replacement funds that are similar in role but not the same ticker/share class.
- Keep trade confirms; do not rely only on one broker’s wash-sale checkbox.
- Remember retirement wrappers follow different annual tax timing (Taxable vs tax-advantaged accounts), but wash sales can still interact across them.
Checklist
- Before harvesting, list every account that might repurchase the same security.
- Measure the 30 days before and after the loss sale.
- Avoid same-ticker buybacks in taxable or IRA accounts inside the window.
- Pause DRIP on the harvested ticker.
- Track disallowed losses and basis adjustments into next year’s file.
- Use carryforward worksheets when allowed losses exceed the annual ordinary-income limit.
Rolling covered calls can wash a buy-to-close loss if you rewrite a substantially identical call: Covered call tax basics.
Active options closes and reopenings are a frequent wash-sale tripwire: Options trading tax basics.
Repurchases in an IRA, spouse account, or second broker—what the wash-sale rule still catches: Wash sales across accounts.
How wash-sale disallowances and missing lots show up as 1099-B basis adjustments on Form 8949: 1099-B basis adjustment basics.
Which Form 8949 adjustment codes flag wash sales and basis corrections: Form 8949 adjustment codes basics.
Offsetting hedges can defer losses under the tax straddle rules (different from the 30-day wash-sale window): Straddle rule basics.
Locking in a gain with a short-against-the-box or offsetting hedge can trigger a constructive sale (gain recognition, not a wash-sale loss disallowance): Constructive sale rule basics.
Swapping one index ETF for another after a loss harvest—substantially identical risk: Wash-sale ETF swap basics.
Traders who elect Section 475(f) mark-to-market often avoid wash-sale friction on covered securities: Mark-to-market trader election basics. Swapping one index mutual fund for another after a loss harvest—substantially identical risk: Wash-sale mutual fund swap basics.
Preferred stock and preferred-ETF harvests: substantially identical issues: Wash sale preferred stock basics.
Educational only. Not tax, legal, or investment advice. Wash-sale details are technical; verify with current IRS publications and a qualified tax professional before you trade around losses.