You sold that tanking position last Tuesday, booked the loss for tax purposes, then bought it back on Thursday because the market overreacted.
Congrats — you just triggered a wash sale, and the IRS won’t let you claim that loss.
Here’s the scoop: Sell a security at a loss and buy the same (or “substantially identical”) security within 30 days before or after? The wash sale rule kicks your tax deduction down the road. That loss gets tacked onto your new position’s cost basis instead. Your holding period carries over too.
Fund managers know the stress. Active traders learn the hard way. One misplaced trade during that 61-day window transforms a smart tax strategy into a compliance nightmare. And when you’re managing multiple portfolios or running complex trading strategies? Wash sales become a minefield of deferred losses and adjusted bases that can blow up your year-end reporting.
Wash Sale Rule Basics: The 61-Day Window and What Counts
The clock starts ticking 30 days before you dump that losing position. Sell today? You can’t touch that same security (or anything “substantially identical”) until 30 days after.
That’s your 61-day danger zone.
What triggers it? Direct stock buys, sure. But also taxable exchanges, options contracts, and closing or opening short positions on substantially identical securities. Stocks, bonds, mutual funds, ETFs, and options on the same underlying security all count. Commodities and forex typically don’t fall under Section 1091.
‘Substantially Identical’ = Facts and Circumstances
You know the 61-day window. But what exactly counts as “substantially identical”? The IRS won’t tell you — it was left vague on purpose.
Different companies’ stocks typically don’t qualify as substantially identical. Apple and Microsoft? You’re fine. But reorganizations, convertibles, and derivatives muddy the water fast. The wash sale rule gets murky when securities share DNA but wear different labels.
ETFs and mutual funds create their own problems. Swap one S&P 500 index fund for another tracking the exact same index? You might trigger a wash sale. Smart money switches to similar but distinct exposure — S&P 500 to Russell 1000 keeps you invested while sidestepping the rule.
Those “nearly twin” ETFs occupy a legal gray zone. Document your rationale when using substitute funds. The IRS loves facts-and-circumstances tests, and you’ll want your reasoning on paper when they come asking.
Accounts, Entities, and the IRA Trap
Paper trails matter when the wash sale rule spans multiple accounts. The rule follows you everywhere — every brokerage account, every platform, all under your tax ID. Brokers only report wash sales within the same account on Form 1099-B. Cross-account violations between your Fidelity and Schwab accounts fall on you to calculate and report via Form 8949. Fund accountants tracking multiple entities know the compliance burden multiplies.
The IRA trap also permanently destroys tax benefits. Sell IBM at a loss in your taxable account while your IRA buys IBM within 61 days, and that loss vanishes forever. Revenue Ruling 2008-5 makes it clear: no basis adjustment, no future deduction.
Spouse accounts and related entities bring different rules too. Section 1091 doesn’t extend wash sales to other taxpayers, but Section 267 disallows losses between related parties. Courts have collapsed spouse “switching” schemes before (read about McWilliams v. Commissioner). Partnerships compute wash sales at the entity level, then allocate the adjustments to investors.
How to Book It: Basis, Holding Period, and Reporting
The wash sale rule doesn’t kill your loss; it postpones it. That disallowed loss gets added to your replacement shares’ basis, and the original holding period tacks onto the new position. Partial repurchases trigger pro-rata disallowance calculations that make fund accounting messy.
Brokers populate Box 1g on Form 1099-B for same-account wash sales only. Everything else lands on your desk. You’ll adjust Form 8949 column (g) when the broker reporting misses cross-account violations or gets the math wrong. Attach explanations when the numbers don’t match.
Short sales and options complicate tracking further. Opening a put, buying a call, or completing a short sale within the 61-day window can trigger wash sale treatment. Your accounting systems need to link option legs to underlying lots, or you’ll miss violations until tax season reveals the damage.
When the Wash Sale Rule Doesn’t Apply (And Where It Doesn’t Exist)
Good news for fund managers tired of counting days and tracking basis adjustments, though: the wash sale rule has legitimate escape routes. Some require advance planning and elections, others depend on what you trade, and the best ones involve parking operations outside U.S. borders entirely.
U.S. Exceptions That Save Your Losses
- Trader Tax Status (Section 475 Mark-to-Market): Qualify as a professional trader and elect mark-to-market accounting and the wash sale rule disappears entirely. You’ll need substantial trading volume, short-term profit focus (not dividends), and regular trading operations — plus Form 3115 filed on time, because you only get one shot at this election.
- Securities Dealers Operating in Ordinary Business: Funds classified as securities dealers dodge wash sale rules when losses come from regular business operations. The IRS will still scrutinize obvious tax-avoidance patterns, but legitimate commercial transactions get a pass.
- Cryptocurrency and Digital Assets (For Now): Crypto remains classified as property, not securities, keeping it outside wash sale territory completely. Sell Bitcoin at a loss and buy it back five minutes later — the deduction still counts, at least until Congress closes this loophole (likely by 2026).
- Inherited or Gifted Securities: Securities acquired through inheritance or gifts don’t trigger wash sales, even within the 61-day window. The transfer needs to be legitimate, though; the IRS knows a disguised sale when it sees one.
- Commodity Futures and Forex: Commodity futures and foreign currency trades currently escape wash sale treatment entirely. Proposed legislation keeps threatening to change this, but until then, your commodity losses remain immediately deductible.
International Markets Where Wash Sales Don’t Exist
- United Kingdom: The U.K. has zero wash sale rules. Capital losses simply carry forward indefinitely against future gains. However, its anti-abuse doctrine theoretically allows authorities to challenge transactions lacking economic substance (they rarely do).
- Continental Europe (Finland, Germany, France): Most European countries skip wash sale rules entirely, relying instead on general anti-abuse provisions. Finland technically has discretionary anti-avoidance rules, but enforcement remains virtually nonexistent.
- South America (Brazil, Argentina, Uruguay, Paraguay): Brazil taxes capital gains at 15-22.5% with no wash sale constraints. Argentina charges 15% with inflation indexing but no wash rules. Uruguay and Paraguay keep it simple: 12% and 8%, respectively, zero wash sale complications.
Stop Counting Days and Start Making Moves
Wash sale rules turn straightforward tax strategies into compliance puzzles. You’ve got the 61-day window to track, substantially identical securities to decode, cross-account violations to catch, and IRA traps that destroy losses forever. Add multiple fund structures, international investors, and year-end harvesting deadlines, and you’re looking at a full-time job just keeping the IRS happy.
Michael Coglianese CPA, P.C., brings 30+ years of alternative investment expertise to your wash sale headaches. Our team includes former NFA compliance auditors who know exactly which trader status elections hold up under scrutiny and which ones don’t. We catch violations during quarterly reviews, not after your K-1s ship. Whether you need Section 475 mark-to-market elections filed correctly the first time, multi-entity structures coordinated across master-feeder funds, or someone who understands why your crypto losses still count while your stock losses don’t, we deliver Big Four expertise without the bureaucracy or pricing. Your fund deserves the best, from tax prep to audit.
Ready to tighten your wash sale controls and optimize your year-end tax plan? Contact us today.