The wash sale rule prevents investors from claiming a tax loss on a security if they buy a substantially identical security within a 61-day window: 30 days before the sale, the day of the sale, and 30 days after. If you trigger a wash sale, the IRS disallows the loss on that transaction.
The loss doesn’t disappear entirely. It gets added to the cost basis of the replacement security, which means you’ll eventually recognize it when you sell that replacement — just not when you wanted to.
The 61-day window in plain terms
Say you own 100 shares of an S&P 500 ETF that you bought at $150 each. The price drops to $120. You sell on October 15, realizing a $3,000 loss.
If you buy back the same ETF (or a substantially identical one) any time between September 15 and November 15, your loss is disallowed for the current tax year. Instead, the $30-per-share disallowed loss gets added to the cost basis of the shares you repurchased, effectively lowering your future gain (or raising your future loss) when you sell the replacement.
The rule exists to prevent investors from manufacturing paper losses while keeping the same economic exposure to an asset.
What counts as “substantially identical”
The IRS has never defined “substantially identical” with precision, which creates real gray areas.
The rule clearly applies when you sell and buy the exact same security, swap into a different share class of the same fund (Vanguard Admiral vs. Investor shares of the same underlying fund), or replace a stock with a call option or derivative on that same company.
The safer territory: selling an S&P 500 fund and buying a total US stock market fund, trading one company’s stock for a competitor’s, or moving between a large-cap blend and a large-cap value fund. Different benchmark, same general market exposure.
The closer the two funds track the same benchmark, the more risk you’re taking that the IRS could treat them as substantially identical. Investors who swap nearly identical ETFs from different providers (for example, IVV and VOO, both S&P 500 trackers from different companies) are taking on more wash sale risk than those who swap to a meaningfully different index.
Cross-account wash sales
A common mistake is thinking wash sales only apply within a single account. They don’t. The rule applies across all accounts you control, including accounts owned by your spouse.
If you sell shares at a loss in your taxable brokerage account and your spouse buys the same fund in their IRA within the 61-day window, the wash sale rule applies. The loss is disallowed. This is particularly tricky for households where both spouses have automatic investment plans or target-date funds that rebalance regularly.
Selling in a taxable account and buying the same fund in your own IRA or Roth IRA also triggers a wash sale, and this version has an especially unfavorable outcome: the disallowed loss is lost permanently. When a wash sale is triggered by a purchase inside a tax-advantaged account, the cost basis adjustment that normally preserves the loss for later can’t happen the same way, because those accounts don’t track cost basis in the same manner for tax purposes.
What happens to the disallowed loss
When a wash sale occurs, your brokerage will note it on your Form 1099-B at year-end. The disallowed loss amount is added to the cost basis of the replacement shares:
You sell a fund at a $1,000 loss and immediately buy back the same fund. The wash sale disallows the $1,000 loss. Your replacement shares have their purchase price increased by $1,000. When you eventually sell those replacement shares, your recognized gain is $1,000 smaller (or your recognized loss is $1,000 larger). The tax benefit is deferred, not destroyed — you get it when you eventually sell the replacement shares.
This means the wash sale rule doesn’t permanently destroy a loss. It only prevents you from taking it now. Whether the deferral matters depends on how your tax situation changes between now and when you eventually sell.
Wash sales and the holding period
Triggering a wash sale also resets the holding period. Short-term and long-term capital gains are taxed at very different rates. If you sell shares you’ve held for 11 months (short-term), the wash sale clock on the replacement shares restarts from the original purchase, which can inadvertently push a future gain into short-term territory. Check the holding period implications before selling near the one-year mark.
How to avoid wash sales when tax-loss harvesting
The standard approach is to swap into a similar but meaningfully different fund during the 30-day blackout period, then reassess whether to switch back after 31 days. For example:
| Sold (loss realized) | Acceptable replacement |
|---|---|
| Vanguard Total Stock Market ETF (VTI) | iShares Core S&P 500 ETF (IVV) — though this is close; consider a large-cap value fund instead |
| Fidelity ZERO Total Market Fund | Schwab Total Stock Market Index Fund |
| SPDR S&P 500 ETF (SPY) | Vanguard Total Stock Market ETF (VTI) |
| US bond index fund | International bond index fund |
Keep a calendar note 31 days out if you want to consider switching back. And run any planned harvesting by your tax advisor if the amounts are significant, since the substantially identical determination can be fact-specific.
Practical tracking
Your brokerage tracks wash sales and reports them on Form 1099-B, typically showing disallowed amounts and adjusted cost basis. Review this form carefully before filing. Tax software like TurboTax or H&R Block imports this data directly from most brokerages, but confirming the adjustments match your records is worthwhile.
If you use multiple brokerages, the platforms don’t communicate with each other about wash sales. You’re responsible for tracking cross-account activity yourself, which is another reason households with multiple taxable accounts and automatic investment plans benefit from keeping a simple log of any loss-harvesting transactions.