The wash sale rule

The wash sale rule connects your loss on a sale or other disposition with your acquisition of substantially identical stock or securities. Under section 1091, you cannot deduct that loss under section 165 when the acquisition falls within the specified period, unless the dealer exception applies.

Your acquisition can be a purchase. It can also be an exchange on which the entire amount of gain or loss is recognized by law. Entering into a contract or option to acquire substantially identical stock or securities in either of those ways can also cause your loss to be disallowed.

For this rule, your stock or securities include contracts or options to acquire or sell stock or securities, except as provided in regulations. The rule therefore reaches beyond your direct purchase of replacement shares.

The statute provides an exception if you are a dealer in stock or securities and sustain the loss in a transaction made in the ordinary course of that business. Both conditions matter. Being a dealer alone does not satisfy the stated exception for your loss.

Your wash sale period includes the day of the sale, the 30 calendar days before the sale, and the 30 calendar days after it. Together, those dates make a 61 calendar day window for your sale at a loss.

Your replacement purchase can come before your loss sale. Section 1091 begins the relevant period 30 days before the disposition. A purchase during that earlier part of the window can therefore matter even though you have not yet sold the original shares.

Buying again following your loss transaction also falls within the timing rule. The statutory period ends 30 days after the disposition. The timing rule includes an acquisition on that final day, as well as an acquisition on the sale date itself.

Your timing analysis also includes a contract or option to acquire substantially identical stock or securities. The statutory language applies when you enter into that contract or option within the same period, subject to the acquisition conditions and exceptions in the rule.

Section 1091 also specifies how you determine the basis of acquired stock or securities when their acquisition caused the loss deduction to be disallowed. This basis rule applies when your acquisition, or your contract or option to acquire, resulted in the nondeductible loss.

You start with the basis of the stock or securities you sold or otherwise disposed of. You then increase or decrease that amount, as appropriate, by the difference between your acquisition price and the price at which you sold or otherwise disposed of the substantially identical stock or securities.

In an illustrative example involving 10 replacement shares, you add the disallowed loss attributable to the 10 affected shares to the cost basis of the 10 new shares. In that situation, you can get the tax benefit of the loss when you sell those new shares.

Your broker reporting instructions also address this adjustment. When a disallowed wash sale loss is reported in box 1g, the instructions require an increase in the adjusted basis of the acquired securities by that reported amount.

The supplied Wealthfront material explains that the wash sale rule applies across your accounts, including your IRAs. It also includes your spouse's accounts if you file jointly. Its examples show that the replacement purchase can occur in a different account from your loss sale.

If you sell a security in your personal account outside retirement and repurchase it within 30 days in your IRA, the supplied material identifies that transaction as a wash sale. The change in account does not remove the transaction from the rule in that example.

For joint filers, a spouse's acquisition of that security in a nonretirement personal account within 30 days of your loss sale is another wash sale described in the material. Your own account activity is therefore only part of the account coverage described in that material.

For your sale and purchase of covered securities with the same CUSIP number in the same account, the reporting party must report any loss disallowed under section 1091 in box 1g. The instructions separately specify the required reporting circumstances for disallowed losses under section 1091.

Required wash sale reporting applies when your sale and purchase both occur in the same account and involve covered securities with the same CUSIP number. These are conditions for the reporting requirement described in the instructions.

The reporting party may report additional disallowed losses in box 1g, but the instructions do not require it to report every loss disallowed under section 1091. For example, reporting is permitted when you sell a security in one account and repurchase it in another.

You therefore cannot treat the scope of mandatory box 1g reporting as the full scope of the wash sale rule. The instructions expressly allow some disallowed losses to fall outside mandatory reporting, including the example involving your sale and repurchase in different accounts.

The statutory test concerns whether your replacement stock or securities are substantially identical to those you sold. The supplied Wealthfront material discusses that requirement specifically for tax loss harvesting with ETFs based on indexes.

For tax loss harvesting with your portfolio of index based ETFs, that material says you need two securities tracking different indexes to avoid violating the substantially identical requirement. It says exchanging an ETF for another that tracks the same index violates that requirement even if the issuer changes.

In its description of managing your portfolio, Wealthfront says it may sell an ETF trading at a loss and replace it with an ETF tracking a different but highly correlated index. It describes the purpose as maintaining your portfolio's risk and return characteristics.

Wealthfront says it then holds the alternative ETF in your portfolio for a minimum of 30 days to help avoid wash sales. Your statutory wash sale window still begins 30 days before your loss sale and ends 30 days after it.

The Schedule D instructions state that the wash sale rules generally apply to transactions involving digital assets that are also stock or securities for tax purposes. The instructions call these assets tokenized securities. Your asset's status as stock or securities is part of that statement.

The same instructions provide a specific exception for your redemption of shares in a floating net asset value money market fund. The wash sale rules do not apply to that redemption.