The Wash-Sale Rule

If you sell a security at a loss and buy the same or substantially identical security within 30 days before or after the sale, the IRS disallows the loss. The disallowed loss is added to the basis of the new shares.

What triggers it

• Buying the same ticker within 30 days before/after the loss sale.
• Buying options or warrants on the same stock.
• Purchases in any account you control — including IRAs, spouse's accounts.
• Dividend reinvestment (DRIP) within the window.

What's "substantially identical"

• Same stock or fund: clearly.
• Two ETFs tracking the same index: most practitioners avoid; the IRS hasn't ruled definitively.
• An S&P 500 fund vs. a Total Market fund: generally considered not identical.
• A stock vs. a different stock in the same sector: not substantially identical.

Practical tax-loss harvesting

The standard practice: sell Fund A at a loss; buy Fund B (different index, similar exposure). Hold Fund B for at least 31 days. Then optionally swap back.

The rule in plain English

If you sell a security at a loss and buy the same or "substantially identical" security within 30 days before or after the sale, the loss is disallowed for tax purposes. The disallowed loss is added to the cost basis of the new shares, deferring the deduction until you eventually sell those shares.

The 61-day window

• 30 days BEFORE the sale
• The day of the sale
• 30 days AFTER the sale

Total: 61 days of restriction. Buying within this window invalidates the tax loss.

What triggers wash sales (the gotchas)

• Buying the same ticker. Obvious.
• Buying call options on the same stock. The IRS considers this substantially identical.
• Purchases in your IRA. The rule extends to your IRAs, 401(k)s, and Roth IRAs.
• Purchases in your spouse's accounts. Including their IRAs.
• Dividend reinvestment (DRIP). A $30 dividend reinvestment within 30 days washes a $30,000 harvest. Disable DRIP on harvested positions.
• Reinvestment of mutual fund capital gain distributions. Same issue as DRIP.

What "substantially identical" means

• Same security: Clearly identical.
• Different share classes of same company: Probably identical (e.g., GOOG and GOOGL).
• Two ETFs tracking the same index: The IRS has never definitively ruled. Most practitioners avoid swapping (e.g., VOO and IVV are both S&P 500 — treat as identical).
• S&P 500 fund and Total Market fund: Generally considered NOT substantially identical (different indexes, broader vs. narrower).
• Different stocks in the same sector: Not substantially identical.

How wash sales play out mathematically

Sell 100 shares of stock at $40 (originally bought at $50). $1,000 loss realized. Buy back same stock at $42 the next day.

• $1,000 loss is disallowed.
• New shares' cost basis = $42 + $10 disallowed loss = $52/share.
• The loss isn't gone — it's deferred until you sell the new shares.
• The clock for long-term vs. short-term resets if the original holding was short-term.

How to do legitimate tax-loss harvesting

Sell Fund A; immediately buy Fund B (different index, similar exposure). Hold Fund B at least 31 days. Optionally swap back to Fund A after the window. No wash sale occurs.

Common wash-sale mistakes

• Dividend reinvestment triggers. $30 reinvestment can disallow huge harvested losses.
• Spouse's IRA purchases. Easy to miss when spouses don't coordinate trades.
• Selling at year-end then buying back in early January. The window crosses calendar years.
• Trading the same ETF across multiple brokers. All count toward your wash-sale calculation.
• Buying back exactly 30 days later. Off by one — must be ≥ 31 days.

Frequently asked questions

Does wash sale apply to crypto?

Currently no — Congress hasn't extended it to crypto. This makes crypto tax-loss harvesting particularly powerful.

What if I have a gain on the original sale?

Wash-sale rule applies only to losses. Gains aren't affected.

How do brokers handle wash sales?

Brokers track within their own platform. Cross-broker wash sales are your responsibility to track. Major loophole for sloppy reporting.

Putting this into practice this week

Concepts only matter if they change behavior. Pick the single most relevant action from the above and put it on your calendar — even 15 minutes of action beats hours of further reading without doing anything. The compound benefit of small consistent moves dwarfs the optimization gain from any single decision. Most people fail at finance not because they don't know what to do, but because they don't act on what they already know.

How this connects to the rest of your financial plan

Personal finance is a system, not a list of independent decisions. The choices you make in one area cascade into others: a tax-loss harvest affects your asset allocation, a 401(k) contribution affects your near-term cash flow, a Roth conversion in 2024 affects RMDs in 2050. Sophisticated financial planning is mostly about understanding these second- and third-order effects. The basics that everyone should master first: emergency fund in cash, capture the full 401(k) match, eliminate high-interest debt, max tax-advantaged accounts before taxable, write down a single-page financial plan and review it annually.

Key takeaways

• Understand the mechanics before you optimize the edges. A solid 70% strategy beats a fragile 95% optimization.
• Automate behavior so you don't depend on willpower. Set-it-and-forget-it is the highest-leverage financial habit.
• Match the strategy to your actual situation, not the situation you wish you had or that influencers describe.
• Review annually; ignore daily noise. The market's short-term moves rarely require a response.
• Consistency over decades beats brilliance over months. Time in the market does the work; trying to time it usually destroys it.

The bottom line

The biggest financial wins come from doing the simple things consistently for decades — not from finding the cleverest single trick. Build the foundation first; the optimizations layer on top once the foundation is solid. The investors who end up wealthy aren't the ones who picked the best stocks. They're the ones who saved consistently, kept costs low, took appropriate risk for their horizon, and didn't sell during crashes. Everything else is detail.

Continue your learning at Krovea

Krovea exists to connect every concept on this page to the next one you should read. Use the site-wide search for any term you're unsure about. Run the relevant numbers on a Krovea calculator with your actual situation — projections beat speculation every time. Look up unfamiliar jargon in the A–Z dictionary. Most readers find their first session on Krovea answers one question and surfaces three more — that's how compounding knowledge works. Subscribe to the weekly briefing if you want the highest-impact one topic delivered without the noise of constant financial media.

A final note on financial decision-making

Every concept covered here exists because someone made a costly mistake first and the rule emerged from the consequences. The 401(k) match exists because Americans weren't saving enough. The Roth IRA exists because mid-century retirees got taxed twice on their nest eggs. The wash-sale rule exists because traders abused loss harvesting. Treat each piece of advice not as arbitrary rules to memorize but as the encoded lessons of prior generations of investors. The framework that survives recessions, regulatory changes, and market manias has been stress-tested in ways no individual could replicate. Following the boring conventional wisdom isn't unimaginative — it's the result of selecting for what actually works at scale across millions of investors and dozens of market cycles.

One last thing — when in doubt, do less

The average investor underperforms their own funds by 1–2% per year because of trading mistakes — entering after rallies, exiting after crashes, switching strategies after they stop working. Inaction has a cost, but action has a much bigger one. When you're not sure what to do, the right answer is usually nothing. Pick the next paycheck's contribution, automate it, and look away until tax season.