Tax-Loss Harvesting and the Wash-Sale Rule
In brief
Tax-loss harvesting realizes an investment loss that may offset capital gains or enter the capital-loss calculation, but the wash-sale rule can disallow the current loss when substantially identical securities are acquired around the sale.
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The main idea
A tax loss is not free money: preserve the portfolio’s intended exposure, account for the wash-sale window, and track the replacement lot’s adjusted basis.
At a glance
Wash-sale window
30 days before or after
The rule can apply when substantially identical stock or securities are acquired within this period around a loss sale.
Internal Revenue Service ↗Disallowed loss
Generally added to basis
The deferred loss generally adjusts the basis of replacement shares rather than disappearing economically.
Internal Revenue Service ↗Broker reporting
Can be incomplete
Publication 550 notes that a wash sale can be nondeductible even when it is not shown on Form 1099-B.
Internal Revenue Service ↗What harvesting does—and does not do
Realizing a loss changes the timing and reporting of taxes; it does not reverse the investment loss. The result depends on gains, other losses, carryovers, future sale prices, and future tax rates.
Selling solely for a tax result can alter asset allocation or create trading costs. A replacement should be evaluated for economic exposure, expenses, liquidity, and whether it could be considered substantially identical.
Look across accounts and purchases
Automatic dividend reinvestment and purchases in another account can complicate wash-sale analysis. Broker reporting may be limited to covered securities with matching identifiers in the same account.
The phrase “substantially identical” is a tax standard, not a simple ETF-category label. This site does not declare that any particular pair of funds is safe for wash-sale purposes.
Sources: Internal Revenue Service
Before acting
Questions to verify
- Review purchases before and after the loss sale.
- Check automatic reinvestment.
- Preserve the intended allocation.
- Track replacement-share basis.
- Get tax advice for uncertain replacements or multiple accounts.
Continue the tax-efficiency cluster