Wash-Sale Rule

The wash-sale rule stops investors from claiming a loss on paper while keeping the position. If you sell a security at a loss and acquire the same or a substantially identical one within 30 days either side of that sale, the loss is disallowed for the year. The window is 61 days in total, counting the day of sale itself.

A disallowed loss is usually deferred rather than destroyed. The amount is added to the cost basis of the replacement shares and the original holding period carries over, so you recover the benefit when you eventually sell the replacement. The cost is timing, not the deduction — with one significant exception below.

The rule follows you across accounts, which is where most accidental violations happen. Selling at a loss in a taxable brokerage account and buying the same fund the next week inside an IRA triggers it, and in that case the loss is permanently lost, because an IRA has no taxable basis to absorb it. The IRS applies the rule across a spouse's accounts and a controlled corporation as well, and automatic dividend reinvestment quietly buys replacement shares on a schedule you may have forgotten about.

"Substantially identical" is deliberately undefined, and that ambiguity is what makes tax-loss harvesting workable. Selling one company's stock and buying a competitor's is clearly fine; selling an S&P 500 fund and buying the identical fund at another firm is clearly not. The common practice — swapping into a fund tracking a different index with similar exposure — sits in between and is widely used, though the IRS has never blessed it explicitly.

Two limits are worth remembering. The rule applies only to losses, so nothing prevents you from realizing a gain and repurchasing immediately. And your broker reports wash sales only for identical securities within the same account, so any violation spanning two accounts is yours alone to track and report.