If you sell an ETF at a loss and buy something substantially identical within 30 days either side, the loss is disallowed. Two things about that sentence catch people out: the window runs backwards as well as forwards, and the loss is not gone — it moves into the cost basis of the shares you bought.
The statute
26 U.S.C. § 1091(a), the operative language:
“In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired … or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165…”
It is 61 days, not 30
Thirty days before, the day of the sale, thirty days after. The common mental model — “wait 30 days after selling” — covers only half of it.
A purchase you made three weeks before deciding to sell at a loss triggers the rule just as surely as one made afterwards. That catches people who buy the dip, watch it fall further, and then sell the older lot to harvest the loss.
The loss is deferred, not destroyed
This is the part most coverage skips, and it changes how worried you should be. § 1091(d) says the basis of the replacement shares becomes the basis of the shares you sold, adjusted by the difference in price.
In plain terms: the disallowed loss is added to the cost basis of what you bought. You get the benefit when you eventually sell those shares without repurchasing. The holding period carries across too.
So an accidental wash sale usually costs you timing — the deduction moves to a later tax year. That is a genuine cost if you were relying on it this year, and no cost at all if you were not.
The one case where the loss is genuinely destroyed
| Where you repurchase | What happens to the loss |
|---|---|
| Same taxable account | Deferred — added to basis under § 1091(d) |
| Different taxable account | Deferred — same treatment |
| Inside an IRA | Destroyed — disallowed, and no basis to recover it through |
An IRA has no cost basis you can benefit from, so the usual rescue mechanism is not available. This is the only version of the rule that permanently removes the deduction rather than postponing it — and automatic IRA contributions on a schedule are a common way to trigger it without noticing.
“Substantially identical” — the undefined term
The entire rule turns on a phrase Congress never defined and the IRS has never defined for index funds. Anyone who tells you where the line sits is giving you a reading, not a ruling.
The widely held professional reading:
| Swap | General view |
|---|---|
| VOO → VTI (S&P 500 → total market) | Different indices — generally considered fine |
| VTI → ITOT (both total market, different providers) | Greyer; different index providers, similar exposure |
| VOO → SPY or IVV (all S&P 500) | The genuinely risky one — tickers differ, portfolios do not |
The pattern: same index is the problem, correlated returns are not. Two funds can move almost identically and still hold different securities, which is the distinction the statute appears to care about — though “appears to” is doing real work in that sentence.
If a meaningful sum is at stake, this is where you ask a tax professional. See also VOO vs SPY vs IVV and VTI vs ITOT for how close those pairs actually are.
The trap that catches careful people
Reinvested dividends are purchases. If your ETF pays a distribution that automatically buys shares inside the 61-day window around a loss sale, that purchase can trigger the rule on part of the position.
It is usually a fraction rather than the whole loss — but it is enough to produce an adjustment you did not plan for. Check whether automatic reinvestment is on before you sell. See do ETFs pay dividends for how the distributions work.
Sources
- 26 U.S.C. § 1091, Loss from wash sales of stock or securities — subsection (a) quoted above, and subsection (d) for the basis adjustment.
General information, not tax advice. The statutory text was read at source on 15 August 2026. The “substantially identical” discussion reflects common professional interpretation rather than IRS guidance, because no such guidance exists for index funds — and the crypto position is the claim here most likely to change.
Frequently asked questions
What is the wash sale rule?
It is the rule that stops you claiming a tax loss on a security you did not really let go of. 26 U.S.C. § 1091(a) disallows the loss deduction where, within a period beginning 30 days before the sale and ending 30 days after it, you acquired — or contracted to acquire — substantially identical stock or securities. Note the window runs in both directions: it is 30 days before plus the sale day plus 30 days after, a 61-day span in total, and buying before you sell triggers it just as buying after does. That surprises people who assume the rule only looks forward.
Do I lose the money when a wash sale is triggered?
No, and this is the most misunderstood part of the rule. The loss is disallowed for now, not destroyed. Section 1091(d) adds the disallowed loss to the cost basis of the replacement shares, so you get the benefit later — when you eventually sell those shares without repurchasing. The holding period carries across too. What a wash sale actually costs you is timing: the deduction moves to a future tax year rather than the current one. That is a real cost if you were counting on the deduction this year, and no cost at all if you were not.
Can I sell VOO and buy VTI to harvest a loss?
Almost certainly yes, and the reason is that they track different indices — VOO follows the S&P 500 and VTI the total US market, holding thousands more companies. The statute turns on the phrase 'substantially identical', which Congress did not define and the IRS has never defined for ETFs. The widely held professional reading is that two funds tracking different indices are not substantially identical even when their returns correlate closely, while two funds tracking the same index likely are. That is a reading, not a ruling. If a large sum is involved, this is the point at which to ask a tax professional rather than a calculator.
What counts as 'substantially identical' for ETFs?
Nobody can tell you with certainty, and any source that claims otherwise is overstating. The term appears in § 1091 without a definition, and the IRS has issued guidance on it for stocks and bonds without ever squarely addressing index funds. The safest position is that the same index means substantially identical; different index providers and different underlying holdings mean it probably is not. The genuinely risky move is selling one S&P 500 ETF to buy another S&P 500 ETF from a different issuer — the tickers differ, the portfolios do not.
Does the wash sale rule apply inside my IRA?
It applies in a way that is worse than most people expect. If you sell at a loss in a taxable account and buy the substantially identical security inside your IRA within the window, the loss is disallowed — and unlike an ordinary wash sale, there is no basis adjustment available to recover it later, because the IRA has no cost basis you can benefit from. That combination makes it the one wash sale that genuinely destroys the deduction rather than deferring it. Automatic IRA contributions running on a schedule are a common way people trigger it without noticing.
Do reinvested dividends trigger a wash sale?
They can, and this is the trap that catches careful people. A dividend reinvestment is a purchase. If your ETF pays a distribution that automatically buys more shares within the 61-day window around a loss sale, that purchase can trigger the rule on part of the loss. It is usually a small amount of the position rather than all of it, but it is enough to produce an unexpected adjustment. Anyone planning to harvest a loss should check whether automatic reinvestment is switched on before selling, not after.
Does the rule apply to crypto?
As written, § 1091 applies to 'stock or securities', and cryptocurrency has generally not been treated as a security for this purpose — which is why the wash sale rule has historically not applied to it. This is an area where the law has been under active legislative attention for several years, so it is the single claim on this page most likely to be out of date by the time you read it. Verify the current position before acting on it.