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Concept · Tax in investing

What is the wash-sale rule?

Direct answer Under IRC §1091 a loss is disallowed if you buy substantially identical stock or securities within 30 days before or after selling at a loss. The disallowed loss is added to the replacement's basis. The rule reaches every account the household controls, including a spouse's, and a repurchase inside an IRA forfeits the loss permanently.

Four facts catch households: the window covers a spouse’s accounts; an IRA repurchase destroys the loss rather than deferring it; brokers only report wash sales within one account and one security, so cross-account matches are the taxpayer’s job; and nobody knows whether two ETFs on the same index count as “substantially identical,” because there is no ruling.

Read the wash-sale rule in four facts.

Sources

  1. IRC §1091law.cornell.edu
  2. IRS Rev. Rul. 2008-5, repurchase inside an IRAirs.gov
  3. IRS Form 8949 instructions, code Wirs.gov

Used in

Direct indexing, in one page Own the 500 stocks instead of the fund that owns them. A $1.16 trillion business built on that idea. What you get, what you pay, and who it fits. Loss harvesting, in one example Sell a stock at a $10,000 loss, buy a similar one the same day, and the loss cuts this year's tax bill by up to $5,210. What actually happened, step by step, and the catch. The wash-sale rule in four facts Buy back the same stock within 30 days of selling it at a loss and the loss is disallowed. That part is well known. The four facts that catch households are about spouses, IRAs, brokers, and ETFs. What an IRA cannot do It cannot borrow, so it cannot short. It destroys a loss harvested next door. And a long-only version of a long/short idea keeps about half the edge. Three limits of the best shelter most people have.

Related concepts

Cost basisIn-kind redemptionTax-loss harvesting

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