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Why this matters…
The IRS wash‑sale rules prevent investors from creating tax losses without changing their economic position. If triggered, your current‑year loss is disallowed and added to the cost basis of the replacement shares—affecting future gains or losses.
When a wash sale is triggered…
• You sell a security at a loss and buy the same or substantially identical security within 30 days before or after the sale (61‑day window).
• All accounts count (including IRAs and your spouse’s accounts); brokers generally only track within the same account/CUSIP.
• Options, contracts to acquire, and short sales can also trigger wash‑sale treatment.
• It is not confined to the calendar year; the 30‑day window can straddle year‑end.
What happens if you trigger it…
• Loss disallowed now (no current deduction).
• Basis & holding period adjusted: disallowed loss is added to the new shares’ basis; holding period tacks.
• Special IRA caveat: If you re‑buy in an IRA within 30 days, the loss is permanently disallowed—no basis increase inside the IRA.
How to avoid wash‑sale issues (and still harvest losses)…
• Swap into a similar but not substantially identical holding for 31+ days (e.g., from a single stock to a sector ETF, or between funds tracking different indexes in the same theme).
• Pause automatic dividend reinvestments and avoid repurchases/assignments until you’re outside the 30‑day window.
• Make tax‑loss harvesting a regular cadence (quarterly/year‑end) and coordinate across all accounts for you and your spouse.
Illustrative position swaps
| Potentially Acceptable Swaps* | Likely Substantially Identical / High‑Risk Swaps |
| Single stock → broader sector/industry ETF (e.g., XYZ Co. → Industrials ETF) | Selling XYZ Co. and buying XYZ Co. again (same CUSIP) within 30 days |
| U.S. large‑cap fund tracking Index A → different manager tracking Index B with meaningful composition differences | Fund share class ↔ ETF share class of the same fund family tracking the same index |
| S&P 500 fund → Total Market or Dividend‑tilted fund (different index methodology) | Writing or buying deep‑in‑the‑money options intended to replicate the same equity exposure within 30 days |
| Single issuer muni bond → diversified muni ETF | Selling a bond and buying a nearly identical CUSIP of the same issuer/terms within 30 days |
Sources: Internal Revenue Code §1091 (wash‑sale rules); Rev. Rul. 2008‑5 (IRA repurchases).
Quick examples
A) Sell in Taxable Account → Buy in Taxable Account (basis carryforward)
- You sell 100 shares of XYZ at $9 you bought at $10 ⇒ $100 loss. Within 30 days you buy 100 shares XYZ at $8 in a taxable account.
- Result: Current loss disallowed; new basis becomes $8 + $1 = $9 per share; holding period tacks. When you later sell, that extra $1 basis reduces your future gain.
B) Sell in Taxable Account → Buy in IRA (permanently lost)
- Same sale as above, but you re-buy in your IRA within 30 days.
- Result: Current loss disallowed and no basis increase in the IRA. The $100 tax benefit is gone for good.
Disclaimer: The information provided herein is intended solely for informational purposes and no person(s) or other third-party may rely upon it as financial, tax, or legal advice or use it for any other purposes. As a result, Royal Financial, and any affiliates, assume no responsibility whatsoever to readers, or any other persons for that matter, as a result of the information contained herein.