The Wash-Sale Rule and Finding a Replacement

Tax-loss harvesting is selling something at a loss to realise it for tax purposes while keeping your market exposure roughly intact. The obstacle is the wash-sale rule, and most of the confusion around it comes from one undefined phrase.

This is reference material on a tax rule, not tax advice. The application to your situation is a question for a professional.

The rule

Under US Internal Revenue Code §1091, a loss is disallowed if you buy a substantially identical security within 30 days before or 30 days after the sale. Both sides count, which makes the window 61 days including the sale date — the "before" half is what catches people, because buying more of something and then selling the older lot at a loss can trigger it without any repurchase at all.

The loss is deferred, not destroyed

Worth being precise, because the rule is often described as if the loss vanishes. A disallowed loss is added to the cost basis of the replacement shares, and the holding period carries over. You get the benefit later, when you sell the replacement.

The exception is an account where basis does not carry — notably a repurchase inside an IRA, where the loss is permanently lost. That is the genuinely costly version of the mistake.

What "substantially identical" actually means

The IRS has never defined it precisely, and that is the whole difficulty. What is broadly settled:

• The same stock, or the same fund, is substantially identical. Obviously.
• Stock in two different companies is not, even in the same industry.
• Two funds tracking different indices are generally treated as not substantially identical, which is the basis of most harvesting practice.
• Two funds tracking the same index from different providers is the genuinely unsettled case. There is no ruling on it, and cautious practitioners avoid it.

Note carefully: correlation is not the legal test. A high correlation does not make two securities substantially identical, and a low one does not make a swap safe. The rule is about the securities' characteristics, not their price behaviour.

So where does correlation come in?

It answers a different question — the practical one. Having decided with a professional what you may hold, you still need to know which candidates actually keep your exposure while you are out of the original. That is measurable.

Take gold as the clean case. If you sell one gold fund, the alternatives track the same metal extremely closely:

Numbers like these are exactly why the gold case needs professional input — funds tracking the same underlying this closely are the unsettled category above. The measurement tells you the exposure is preserved; it does not tell you the swap is permitted.

The more comfortable version is a substitute tracking a different index: correlated enough to keep you in the market, built on a different benchmark. You can look up candidates for any ticker in the correlation finder, which reports one-year and three-year correlation and relative volatility side by side.

Where it goes wrong in practice

• Accounts are aggregated. The rule applies across all your accounts, including your spouse's and an IRA. Selling in a taxable account and buying in an IRA triggers it — and that is the version where the loss is gone for good.
• Automatic reinvestment. A dividend reinvested during the window is a purchase. This is the most common accidental trigger by a wide margin, and it can disallow part of a loss on a position you thought you had cleanly exited.
• Standing orders. A recurring monthly contribution into the same fund does the same thing, quietly, on schedule.
• Options count. Acquiring a call option on the security can trigger it.
• The 31st day. Count carefully and from the settlement conventions your broker uses. Being one day early undoes the whole exercise.

What the exercise is actually worth

Harvesting defers tax, it does not eliminate it — your basis drops, so the gain is larger later. The benefit is the time value of paying later, plus the possibility of offsetting gains taxed at a higher rate, plus up to $3,000 a year of ordinary income offset in the US. Real, and smaller than the enthusiasm around it implies.

It is also worth nothing at all inside a tax-advantaged account, which is where a surprising number of people first hear about it.

Figures on this page are measured from daily returns over the year to 2026-09-10, across 5,250 liquid US securities, and are rebuilt nightly. Nothing here is tax or investment advice; the application of §1091 to your circumstances is a question for a qualified professional.

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