The Wash-Sale Mistakes That Can Erase Your Year-End Tax Loss
A single automatic IRA purchase, one your brokerage never flags, can quietly erase a tax loss you spent all year setting up. Here are the overlooked accounts and settings that trigger the wash sale rule most often.
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A retired schoolteacher (a composite, not a real person) sells a losing fund in her taxable brokerage account in December. She plans to use the loss against gains she took earlier. The trade settles without a problem. Then her IRA’s automatic monthly purchase buys the same fund a week later.
That one routine purchase can wipe out her deduction. Under IRS guidance, she may never get it back. The cause is the wash sale rule, and it tends to catch investors through accounts and settings they forgot were running.
How the Wash Sale Rule Works and What It Takes Away
The rule sits in Section 1091 of the Internal Revenue Code. It prohibits a loss when, within a window beginning 30 days before the date of such sale or disposition and ending 30 days after such date, you acquire substantially identical stock or securities or enter into a contract or option to acquire them (26 U.S.C. § 1091(a)). Dealers trading in the ordinary course of business are exempt. Retirees are not.
What counts as “substantially identical”? The IRS’s Publication 550 for tax year 2025 says you “must consider all the facts and circumstances,” and adds that one corporation’s stock ordinarily isn’t substantially identical to another corporation’s.
When the rule applies, the loss usually moves rather than disappearing. Publication 550 gives this example: you buy 100 shares for $1,000, sell them for $750, and buy them back within 30 days for $800. You can’t deduct the $250 loss. It gets added to your new basis, which becomes $1,050. Your holding period for the new shares also includes the time you held the old ones. You get the deduction when you finally sell the replacement shares.
Mistake One: Buying It Back in an IRA or Roth IRA
Publication 550 lists buying substantially identical stock for your IRA or Roth IRA as a wash sale trigger. Then it excludes that case out of the basis adjustment. The instruction to add the prohibits loss to the new shares’ cost applies “except in (4) above,” and item four is the IRA purchase.
That exception is what makes this mistake so costly. Inside an IRA there is no taxable lot that can carry the loss forward. So the loss you meant to harvest is gone, not just delayed. Automatic contributions and scheduled IRA purchases are the usual way it happens.
Mistake Two: Your Spouse’s Account Counts Too
According to Publication 550, if you sell and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
Your brokerage can’t see your spouse’s separate account, so keeping track falls to the two of you. Before either of you sells at a loss, compare holdings across both accounts. That includes a business you control that holds investments.
Mistake Three: Dividend Reinvestment Quietly Buys Shares Back
Every reinvested dividend is a purchase. When you buy fewer shares than you sold, Publication 550 has you match the shares bought with an equal number of the shares sold. Only the matched shares lose the deduction.
The publication’s worked example shows the math. An investor has a $1,000 loss on 100 shares after buying 75 shares within 30 days before the sale. The $750 loss on those 75 shares is prohibits. The $250 on the other 25 shares stays deductible. A small reinvested dividend works the same way and knocks out a small piece.
The window runs in both directions, so a dividend reinvested in the weeks before your sale counts too. Switch dividends to cash and pause recurring buys for that holding in every account. Do it well ahead of the sale, and leave them off until the window after the sale closes.
Mistake Four: Options and Look-Alike Index Funds
Section 1091 covers anyone who has entered into a contract or option so to acquire substantially identical securities. Publication 550 adds that the rules apply to losses on contracts and options to buy or sell stock. They also apply if you sell common stock at a loss and buy warrants on the same company’s common stock. Buying call options right after a loss sale can trigger the rule.
Switching between funds is the gray area. Publication 550 relies on its facts-and-circumstances test and doesn’t say whether two funds tracking the same index are substantially identical. Some investors sell one index fund and buy a near-twin from another company. Moving into a fund that tracks a different index is a clearer position.
A Pre-Sale Checklist That Protects Your Loss
- List every account that holds the security: taxable, traditional IRA, Roth IRA, your spouse’s accounts, and any corporation you control.
- Turn off dividend reinvestment and recurring purchases for that holding in all of them.
- Look back 30 days before the sale date for any purchases.
- Mark the date 30 days after the sale. Until then, don’t buy the security or options on it in any account.
- If you want to stay invested, buy something that clearly differs from what you sold.
The safest approach is simple. Sell, then keep that security, and anything that looks like a clone of it, out of every household account for 30 days on each side of the sale. Before a large harvest that impacts IRAs or a spouse’s portfolio, it’s worth having a CPA check the trades (the wash sale rule is one of nine IRS traps we mapped out in a free guide to the quiet rules that drain retirement accounts).
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Vilma Rios is a tax professional and tax content contributor with more than 15 years of experience in tax and accounting. She specializes in federal tax research, tax education, and translating complex tax rules into clear, practical information for individuals, families, and small-business owners.
Vilma is a Content Tax Contributor II with the National Association of Tax Professionals (NATP), where she contributes to tax education and professional content. She has also presented tax information through webinars, including Spanish-language tax education, and has appeared on Telemundo 47 discussing tax topics and helping viewers understand important tax-filing requirements.
Her experience also includes tax and accounting work, tax research, IRS-related matters, and public tax education. While in college, Vilma volunteered in an IRS-sponsored tax assistance program and was recognized for her community service by local and state officials.
Known as “Your Tax Geek,” Vilma is passionate about making taxes easier to understand and helping people navigate an increasingly complex tax system.
