Wash Sale Rules
The wash sale rule (26 U.S.C. § 1091) disallows a capital loss deduction when you sell a security at a loss and purchase a "substantially identical" security within a 61-day window — 30 days before the sale, the sale date itself, and 30 days after. The rule prevents taxpayers from harvesting a tax loss while maintaining essentially the same market position. Critically, the disallowed loss is not permanently lost — it is added to the cost basis of the replacement security, deferring (not eliminating) the tax benefit until the replacement is eventually sold. The most dangerous trap: wash sales can occur across accounts. If you sell a stock at a loss in your taxable brokerage and buy the same fund in your IRA within 30 days, the loss is disallowed and, because the IRA is tax-deferred, the basis adjustment cannot be tracked — making the loss permanently lost. Cryptocurrency is currently exempt from wash sale rules (the IRS treats crypto as property, not "stock or securities" under § 1091), allowing crypto investors to harvest losses and immediately repurchase — a tax advantage that Congress has been working to eliminate through the Wash Sale Modernization Act and similar legislation. Bonds, options, and warrants on the same underlying security can also trigger wash sales. The "substantially identical" standard is broad but not infinite — switching from one large-cap ETF to a similar (but different index) ETF typically avoids wash sale treatment.
Current Law (2026)
The wash sale rule disallows a capital loss deduction if you purchase a "substantially identical" security within 30 days before or after the sale at a loss.
| Parameter | Value |
|---|---|
| Window | 61 days total (30 before + sale day + 30 after) |
| Applies to | Stocks, bonds, options, mutual funds, ETFs |
| Basis adjustment | Disallowed loss is added to the cost basis of the replacement security |
| Holding period | Tacked (includes the original holding period) |
Legal Authority
- 26 U.S.C. § 1091 — Loss from wash sales of stock or securities
How It Works
The "substantially identical" standard determines whether a repurchase triggers the wash sale rule. Buying a different company's stock — even a direct competitor — is not substantially identical. Buying back the exact same security is. For ETFs and mutual funds, the standard is fuzzier: two ETFs tracking the same index (e.g., Vanguard's VOO and iShares' IVV, both S&P 500) are substantially identical; two ETFs tracking different indexes with different underlying compositions are generally treated as not substantially identical. The IRS has issued no bright-line test for fund similarity, so practitioners apply a reasonable-divergence standard: different benchmarks with meaningfully different holdings are generally safe, while same-index different-provider funds are not. Bonds, options on the same underlying security, and convertible bonds can also trigger the rule within the 61-day window.
The wash sale rule reaches across all accounts you control. Purchasing the same security in a spouse's account, a traditional IRA, or a Roth IRA within the 30-day window triggers the wash sale just as if you repurchased in your own taxable account. For IRA repurchases, the consequence is particularly harsh: in a taxable account, the disallowed loss is added to the basis of the replacement shares — deferring the tax benefit until those shares are sold. When the replacement purchase is inside an IRA, however, basis adjustments cannot be tracked in a tax-deferred account, making the loss permanently gone, not deferred. Automatic dividend reinvestment plans, automated monthly contributions to retirement accounts, and robo-advisor rebalancing across linked accounts are the most common sources of inadvertent cross-account wash sales.
When the replacement purchase is in a taxable account, the disallowed loss is not permanently eliminated — it rolls into the cost basis of the replacement shares, increasing future deductible loss or decreasing future gain when those shares are eventually sold. The original holding period also "tacks" — the replacement shares inherit the old holding period of the sold shares, affecting whether the eventual gain or loss qualifies for long-term treatment. The net effect defers the tax benefit to the replacement's sale date, not eliminates it. Tax-loss harvesting strategies must account for this: a harvested loss today comes with reduced basis in the replacement position that will produce more taxable income in a future year when that position is eventually sold.
How It Affects You
If you're doing tax-loss harvesting: Sell the losing position and immediately purchase a substantially similar but not identical replacement to stay invested. The standard example: sell Vanguard S&P 500 ETF (VOO) and buy iShares Core S&P 500 ETF (IVC) — likely a wash sale (same index, same securities). Instead: sell VOO and buy Vanguard Total Market ETF (VTI) — different index with ~500 additional small/mid-cap holdings. The IRS hasn't published a bright-line ETF similarity test, but different-index ETFs are generally treated as not substantially identical. Harvested losses can offset both short-term gains (taxed at ordinary rates up to 37%) and long-term gains (15-20%), making tax-loss harvesting especially valuable in years with significant realized gains.
If you're doing year-end tax-loss harvesting: Losses harvested in late November or December require you to avoid repurchasing the same security through late January. If you need to maintain the market position, hold a substitute investment for the full 31-day window after the sale. Don't reduce to cash — substitution funds (a different but similar ETF) let you stay invested. Track the re-entry date carefully; even one day within the window voids the loss.
If you have IRAs where you might inadvertently repurchase: If you sell a stock at a loss in your taxable account and then purchase the same security in your IRA or Roth IRA within 30 days (before or after), you've triggered a wash sale — and the disallowed loss doesn't get added to your IRA basis. It's permanently gone, not deferred. This catches investors whose IRA has dividend reinvestment enabled, automated monthly purchases, or whose robo-advisor account is linked to an IRA that they don't monitor closely. Before harvesting losses, disable automatic reinvestment in all accounts for the affected security.
If you harvest losses in crypto: Cryptocurrency is classified as property (not a "stock or security" under IRC § 1091), so wash sale rules do not apply. You can sell Bitcoin at a loss and repurchase immediately, claiming the full loss for tax purposes. This asymmetry with stocks is significant and is on Congress's radar — multiple bills in the 119th Congress propose extending wash sale rules to crypto. If enacted, the strategy disappears immediately. Crypto investors doing aggressive loss harvesting should understand this is a window that may close, and consider timing large harvests before any legislation moves.
State Variations
Most states follow federal wash sale rules. No significant state-level variation.
Implementing Regulations
- 26 CFR Part 1 — Income tax regulations (§ 1.1091-1: losses from wash sales of stock/securities; § 1.1091-2: basis of stock acquired in wash sales)
Pending Legislation
- Cryptocurrency: Wash sale rules currently do NOT apply to cryptocurrency (it's classified as property, not securities). Proposals to extend wash sale rules to crypto are recurring.
- Substantially identical definition: Proposals to clarify or broaden what constitutes "substantially identical" for ETFs and mutual funds.
Recent Developments
- Cryptocurrency remains exempt from wash sale rules in 2026: Unlike stocks and securities, cryptocurrency is classified as property (not a "stock or security" under IRC § 1091), so wash sale rules do not apply. Crypto investors can sell Bitcoin at a loss, immediately repurchase Bitcoin, and still claim the full tax loss — a strategy not available with stocks. The Infrastructure Investment and Jobs Act (2021) and subsequent legislation expanded crypto reporting requirements but did not extend wash sale rules to crypto. Multiple bills in the 119th Congress propose closing this gap; if enacted, the strategy would disappear immediately. This remains one of the most significant asymmetries between stock and crypto tax treatment.
- IRS scrutiny of ETF tax-loss harvesting pairs: Tax-loss harvesting with ETFs depends on selling one ETF and buying a "not substantially identical" replacement. The IRS has not published a bright-line test for ETF similarity, but practitioners generally treat different-index ETFs as safe (e.g., selling Vanguard S&P 500 ETF and buying iShares S&P 500 ETF is likely a wash sale; selling S&P 500 and buying total market is generally considered safe). As ETF tax-loss harvesting has grown, expect IRS guidance or enforcement to eventually address the "substantially identical" standard for index funds.
- IRA repurchase creates permanent loss — the most dangerous wash sale trap: If you sell a stock at a loss in a taxable account and purchase the same stock in your IRA or Roth IRA within the 30-day window, you've triggered a wash sale — and the disallowed loss doesn't get added to your IRA basis. The loss is permanently gone, not deferred. This trap catches investors doing aggressive year-end harvesting when automated reinvestment or dividend reinvestment in a linked retirement account repurchases the same security.
- Robo-advisor and automated harvesting increasingly common: Betterment, Wealthfront, and major brokerage tax-loss harvesting tools now monitor wash sales in real time across accounts they manage. However, they generally cannot see accounts held at other brokerages. Investors using multiple brokerages, IRAs, and employer plans should manually track purchases across all accounts to avoid inadvertent wash sales during harvest periods.