What Is the Wash Sale Rule?
The wash sale rule is an IRS regulation designed to prevent investors from claiming artificial tax losses. Under IRC Section 1091, if you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale, the loss is disallowed for tax purposes. This 61-day window (30 days on either side of the sale date) is what makes tax-loss harvesting tricky for DIY investors.
The rule exists because without it, investors could sell a stock to claim a loss, immediately repurchase it, and maintain the exact same portfolio position while reducing their tax bill. The IRS closed this loophole decades ago, but many investors still accidentally trigger wash sales — especially those who use automated investing, dividend reinvestment, or multiple brokerage accounts.
How the 30-Day Window Works
The wash sale window is not just 30 days after your sale. It is a 61-day period that includes:
- 30 days before the sale date
- The sale date itself
- 30 days after the sale date
This means if you sell VTI at a loss on June 1, you cannot buy VTI (or a substantially identical ETF) between May 2 and July 1 without triggering a wash sale. Many investors mistakenly believe they only need to wait 30 days after selling, but the pre-sale lookback period catches those who accumulate shares right before a planned loss sale.
The timing rule applies across all your accounts — including IRAs, 401(k)s, and taxable brokerage accounts at different firms. The IRS does not care which account holds the repurchase. If you sell in your taxable account and your spouse buys the same security in their IRA, it is still a wash sale.
What Counts as "Substantially Identical"?
The IRS deliberately leaves this term vague. Substantially identical securities are not limited to the exact same ticker. Here is what generally triggers the rule:
- The same stock or ETF (e.g., selling VTI and repurchasing VTI)
- Different share classes of the same company (e.g., GOOG and GOOGL)
- ETFs that track the exact same index with near-identical holdings (e.g., VOO and SPY both track the S&P 500)
What generally does NOT trigger a wash sale:
- Different ETFs tracking different indices (e.g., VTI total market vs. VOO S&P 500)
- ETFs vs. mutual funds with different structures, even if tracking similar indices
- Stocks of different companies in the same sector
The gray area — and where robo-advisors often play — is between ETFs that track similar but not identical indices. For example, switching from a total U.S. market ETF to a large-cap ETF may or may not be considered substantially identical depending on holdings overlap. When in doubt, consult a tax professional.
How to Avoid Wash Sales
Tax-loss harvesting requires selling at a loss and replacing your exposure with something different enough to avoid the wash sale rule, but similar enough to maintain your desired asset allocation. Here are the most common strategies:
- Use a replacement ETF in a different asset class. Sell a U.S. total market ETF and buy a developed markets ETF for 31 days, then switch back. This maintains equity exposure while avoiding substantial identity.
- Switch between factor ETFs. Replace a broad market ETF with a value or quality factor ETF targeting the same geography. The holdings overlap is usually low enough to avoid the rule.
- Temporarily hold cash or bonds. The safest (but most conservative) approach is to park proceeds in a money market fund or short-term treasury ETF for 31 days. You miss any market rally but completely eliminate wash sale risk.
- Track wash sale windows across all accounts. Disable dividend reinvestment and automatic purchases for the security you sold. A single $50 dividend reinvestment can wreck a $5,000 loss harvest.
TaxGhost's upcoming tax-loss harvesting engine will automate this tracking across all your accounts, flag wash sale risks before you trade, and suggest pre-vetted replacement securities that maintain your allocation without triggering the rule. Sign up for early access to be notified when it launches.