Wash Sale

Tax authorities established the wash-sale rule to prevent investors from claiming a paper loss for tax purposes while maintaining essentially unchanged economic exposure. If the rule is triggered, the disallowed loss is not permanently lost — it is added to the cost basis of the repurchased security, effectively deferring rather than eliminating the benefit. The rule applies within a window that spans thirty days before and thirty days after the sale date, creating a sixty-one-day period to navigate carefully.

For substantial families pursuing systematic tax-loss harvesting, wash-sale compliance is an operational challenge, particularly when the same security appears across multiple accounts — individual, trust, retirement, and spousal accounts may all be considered together under current regulatory interpretation. A hypothetical family running a separately managed account alongside a separately held index fund could inadvertently trigger a wash sale by purchasing the fund shortly after harvesting a loss in an overlapping stock.

What counts as "substantially identical" is a nuanced question. Two funds tracking different indexes are generally not considered substantially identical, but two funds tracking the same index likely are. The boundaries are not always crisp, and the consequences of an inadvertent wash sale can undermine a carefully planned tax strategy. A qualified tax attorney or CPA must evaluate any specific situation, as rules and their interpretation can evolve.