The Wash-Sale Rule: A Deep Dive for Active Investors

The rule, exactly

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. Instead, it's added to the basis of the replacement shares.

The 61-day window

The window is 30 days before + the sale day + 30 days after = 61 days total. People remember 'within 30 days' and forget the prior 30 — that side trips up dividend reinvestment and dollar-cost-averaging.

What 'substantially identical' means in practice

• Same stock or ETF — clearly wash
• Different share classes of the same fund (Admiral vs Investor) — generally treated as identical
• Two S&P 500 index ETFs from different providers — gray area, the IRS hasn't ruled definitively but most pros treat as identical
• S&P 500 ETF vs total-market ETF — generally NOT identical
• Stock vs option on that stock — IRS treats deep ITM options as identical

It applies across all your accounts

The wash-sale rule looks at all accounts you control plus your spouse's. Sell VTI in your taxable brokerage at a loss and buy VTI in your IRA within 30 days? Wash sale — and the loss is lost forever because IRA basis adjustments don't help you.

Avoiding wash sales while harvesting losses

• Pause auto-investing and dividend reinvestment in the security for 31 days before/after
• Swap to a different-but-similar ETF (e.g., VOO → IVV is risky; VOO → VTI safer)
• Wait 31 days and buy back identical shares
• Check your spouse's accounts

Crypto and the wash-sale rule

Currently the wash-sale rule does not apply to crypto because crypto is property, not a security. Legislation has been proposed but not enacted as of 2024. Same-day sell-and-rebuy is legal for crypto losses today.

What if you accidentally wash?

The loss isn't gone — it's deferred into the cost basis of the new shares. Sell those eventually and you get the deferred loss back as a smaller gain or bigger loss. Just keep meticulous records.