The Wash-Sale Rule in Plain English

The wash-sale rule disallows a tax loss if you buy the same or a "substantially identical" security within 30 days before or after the sale, a 61-day window in total. The loss is not gone forever (it is added to the cost basis of the replacement shares), but the current-year deduction you were harvesting disappears, and if the repurchase happens inside an IRA, the loss is destroyed entirely.

The rule comes from IRC Section 1091, designed to stop investors from claiming a loss and buying right back in as if nothing changed.

The Traps Most People Miss

"Substantially identical" is narrower than "similar." Selling one provider's S&P 500 fund and buying another provider's S&P 500 fund is almost certainly a wash sale, because both track the same index. Selling that position and buying a total market fund, or a large-cap fund tracking a different index, is a different story: the indexes are distinct, the holdings differ at the margin, and the IRS has not historically treated that swap as substantially identical. You do not have to sit in cash for 31 days.

The spousal account trap. The rule applies across accounts you control and accounts your spouse controls. Sell in your taxable account while your spouse buys the same security in their IRA, and the wash sale is triggered. One household, one rule.

The IRA trap is worse. When the repurchase happens inside an IRA, the disallowed loss is not added back to your basis anywhere. It is lost entirely, with no recovery.

The basis-transfer mechanic. In taxable accounts, the disallowed loss raises the basis of the replacement shares, reducing the gain when you eventually sell. You have postponed the benefit, not lost it.

Worked Example: Harvesting $50,000 Without Tripping the Rule

Say it is October and you hold $200,000 in a large-cap growth ETF in your taxable account, sitting at a $50,000 unrealized loss. On day one, you sell it and immediately buy a large-cap ETF tracking a different index with meaningfully different constituents. You stay fully invested and realize $50,000 in losses with no gap in market participation. After 31 days, you can keep the replacement or sell it and buy back the original; either way the loss is intact.

At the 37% federal bracket, that $50,000 loss shelters capital gains taxed at up to 20% plus the 3.8% net investment income tax, and paired with a Roth conversion in the same year it can do even more. I cover that combination in Tax-Loss Harvesting: How to Turn a Down Market Into Real Tax Savings.

How This Connects to the Soil Layer of Your Plan

This is squarely a Soil-layer decision. The Sporos Doctrine uses the Soil stage to describe the tax architecture of a plan: which accounts hold which assets and how current-year moves interact with future bracket exposure. The wash-sale rule is a household-level coordination problem, which is exactly where structure matters.

Frequently Asked Questions

Does the wash-sale rule apply to cryptocurrency?

As of now, no. Crypto is treated as property, not a security, so IRC 1091 does not currently reach it, though Congress has proposed closing this gap in prior sessions.

What happens to the disallowed loss if I never sell the replacement shares?

It sits in the basis of the replacement shares indefinitely. If you donate those shares to charity or pass them at death with a step-up in basis, the deferred loss is lost permanently.

Is there a dollar threshold below which the wash-sale rule does not apply?

No, the rule applies to any amount. There is no de minimis exemption.

How do I document a tax-loss harvest for my accountant?

Record the sale date, the replacement purchase date, the securities involved, and the specific lots sold. Your brokerage's 1099-B will not flag a wash sale across accounts at different custodians; that coordination falls on you.

What to Do Next

What decides this for you. Whether you hold the same or a similar fund anywhere else, including accounts you do not think of as yours to manage. The rule reaches across your spouse's accounts and your IRAs, not just the account you sold from.

Where it goes wrong. The window runs 30 days on both sides of the sale, so a purchase you made three weeks before deciding to harvest can disqualify it retroactively. Automatic dividend reinvestment is the quiet killer here, because it buys small amounts on a schedule nobody is watching and a single reinvested dividend inside the window is enough. And the IRA version is uniquely bad: in an ordinary wash sale the disallowed loss is added to the basis of the replacement shares so you recover it eventually, but when the repurchase happens inside an IRA it is added nowhere. The loss is simply destroyed.

Worth a conversation if you have automatic reinvestment switched on anywhere, you hold overlapping funds across several accounts, or you and your spouse invest in similar things separately. The exposure is usually in the account nobody was thinking about. Book a call.

The information provided is for educational purposes only and does not constitute investment, legal, or tax advice. Tax law changes frequently — verify current rules before acting. Consult with qualified professionals for guidance specific to your situation.