He Plans to Sell a Fund for a $30,000 Loss in Taxable Brokerage and Rebuy It in an IRA — But the IRS Can Make That Loss Disappear

Selling a fund at a loss and then repurchasing it inside an IRA may seem like a neat tax workaround, but one IRS ruling turns the loss from a temporary delay into a permanent erase. What vanishes can be even worse than it first appears…

A common tax move works like this: an investor with a $30,000 loss in a fund held in a taxable brokerage account sells the investment, uses the loss to reduce this year’s tax bill, and then buys the same fund again in an IRA a week later. The investor keeps the position and claims the write-off. It can look like a free tax break.

Many investors try this strategy, and it is discussed frequently on investing forums. A Bogleheads thread about the move points to Revenue Ruling 2008-5 as the reason it does not work. Under that ruling, a loss that might otherwise only be postponed is permanently disallowed.

How a Wash Sale Normally Only Delays the Loss

A wash sale occurs when someone sells an investment at a loss and buys a “substantially identical” one within 30 days before or after the sale. In that situation, the loss cannot be deducted in that tax year.

In most cases, that rule only changes the timing. IRS Publication 550 says the disallowed loss is added to the cost basis of the replacement shares. Cost basis is the amount used to figure gain or loss when the shares are eventually sold. The publication says this adjustment “postpones the loss deduction until the disposition of the new stock or securities.” In other words, the tax break usually comes back later.

Why an IRA Purchase Eliminates It

Publication 550 includes buying substantially identical stock “for your individual retirement arrangement (IRA) or Roth IRA” as a trigger. It then excludes that situation from the basis adjustment. Revenue Ruling 2008-5 makes the point explicit: the loss is disallowed, and “the individual’s basis in the IRA or Roth IRA is not increased by virtue of section 1091(d).”

Because shares inside an IRA do not have a cost basis in the same way taxable-account shares do, the loss has nowhere to go. A Roth IRA is treated the same way.

A spouse’s purchase can also count. Publication 550 says that if “your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.” That wording does not carve out a spouse’s IRA.

What It Means in Real Dollars

Assume he has already locked in at least $30,000 of long-term gains this year and is subject to the 15% long-term capital gains rate. A valid loss would offset those gains and save about $4,500 in federal tax.

If there are no gains to offset, the loss can instead reduce ordinary income, but only up to $3,000 per year, or $1,500 for married people filing separately. Any remainder carries forward to future tax years until it is used up. A married couple in the 24% bracket, with taxable income above $211,400 in 2026, would save about $720 a year, and it would take 10 years to absorb the full loss. If the replacement shares are bought in the IRA, none of that benefit remains. This is one of several IRS rules that can quietly reduce retirement-account value, and the rest are covered in a free guide.

Automatic Purchases That Can Trigger It Quietly

Dividend reinvestment is the easiest trap to miss. If the IRA already owns the same fund and a dividend is paid during the window, the automatic reinvestment counts as a purchase. Publication 550 matches shares bought against shares sold, so even a small reinvestment can eliminate a matching portion of the loss. That portion is lost for good.

A 401(k) is less clearly addressed. The ruling specifically covers IRAs and Roth IRAs and does not mention workplace plans. Still, a payroll contribution that buys the same fund during the window resembles the kind of purchase the ruling discusses, so it is safer to treat it as a potential problem.

There is also the question of what counts as “substantially identical.” Publication 550 says the answer depends on “all the facts and circumstances in your particular case,” and the IRS has not drawn a bright line for funds. Two share classes of the same fund generally own the same portfolio, so they are usually treated as identical. Two index funds that follow different indexes are generally treated as different investments.

Three Ways to Preserve the Loss

1. Wait out the window. Avoid buying the fund in any account for 30 days before or after the sale. That means being out of the market for about a month, but the loss remains intact.
2. Swap to a similar fund in the taxable account. Choosing one that tracks a different index keeps the money invested and gives the loss clean treatment later. For many investors, this is the more practical choice because it avoids holding cash.
3. Stop automatic buying everywhere. Turn off dividend reinvestment and adjust 401(k) contribution settings in every account, including a spouse’s, that holds the same fund until the window closes.

Before harvesting a loss, check every household account for automatic dividend reinvestment in that fund. That setting is one of the most common ways to trigger a wash sale without realizing it, and once it happens inside an IRA, the loss cannot be recovered.