Wash-Sale Pitfalls That Can Wipe Out Your Year-End Tax Loss

A single automatic IRA purchase — one your brokerage may never flag — can quietly eliminate a tax loss you worked all year to create. These are the overlooked accounts and settings that most often trigger the wash-sale rule.

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Imagine a retired schoolteacher, shown here as a composite rather than a real person, selling a losing fund in her taxable brokerage account near year-end. She plans to use the loss to offset gains from earlier in the year. The trade settles normally. A week later, her IRA’s automatic monthly investment buys the same fund.

That routine purchase can erase the deduction she expected. Under IRS guidance, she may never recover it. The problem is the wash-sale rule, which often catches investors through accounts and settings they forgot were still active.

How the Wash-Sale Rule Works and Why It Matters

The rule is found in Section 1091 of the Internal Revenue Code. It disallows a loss when, within a period starting 30 days before the sale and ending 30 days after it, 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 notes that stock in one corporation is ordinarily not substantially identical to stock in another corporation.

When the rule applies, the loss usually is deferred rather than lost entirely. 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 cannot deduct the $250 loss. Instead, it is added to the basis of the new shares, which becomes $1,050. Your holding period for the replacement shares also includes the time you held the original ones. You receive the deduction when you eventually sell the replacement shares.

Mistake One: Repurchasing Through an IRA or Roth IRA

Publication 550 lists buying substantially identical stock for your IRA or Roth IRA as a wash-sale trigger. But it excludes that case from the basis adjustment. The rule that adds the disallowed loss to the cost of the new shares applies “except in (4) above,” and item four is the IRA purchase.

That exception is what makes this mistake so expensive. Inside an IRA, there is no taxable lot to carry the loss forward. So the loss you intended to harvest is gone, not merely postponed. Automatic contributions and scheduled IRA purchases are the most common way this happens.

Mistake Two: A Spouse’s Account Can Trigger It 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 cannot see a spouse’s separate account, so the responsibility falls on both of you. Before either spouse sells at a loss, compare holdings across both accounts. That also includes any business you control that holds investments.

Mistake Three: Dividend Reinvestment Can Quietly Repurchase Shares

Every reinvested dividend counts as a purchase. If you buy fewer shares than you sold, Publication 550 requires you to match the shares bought with an equal number of the shares sold. Only the matched shares lose the deduction.

The publication’s example shows the calculation. An investor has a $1,000 loss on 100 shares after buying 75 shares within 30 days before the sale. The $750 loss tied to those 75 shares is disallowed. The remaining $250 on the other 25 shares stays deductible. A small reinvested dividend works the same way and can eliminate only part of the loss.

The window works in both directions, so a dividend reinvested in the weeks before the sale also counts. Move dividends to cash and pause recurring purchases for that holding in every account. Make the change well before the sale, and keep it off until the post-sale window closes.

Mistake Four: Options and Similar Index Funds

Section 1091 applies to anyone who enters into a contract or option to acquire substantially identical securities. Publication 550 adds that the rules cover 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 that company’s common stock. Buying call options soon after a loss sale can also trigger the rule.

Switching between funds is the gray area. Publication 550 relies on its facts-and-circumstances test and does not say whether two funds tracking the same index are substantially identical. Some investors sell one index fund and buy a nearly identical version from another company. Moving into a fund that tracks a different index is a clearer choice.

A Pre-Sale Checklist to Help Protect Your Loss

1. List every account that holds the security: taxable, traditional IRA, Roth IRA, your spouse’s accounts, and any corporation you control.
2. Turn off dividend reinvestment and recurring purchases for that holding in all of them.
3. Look back 30 days before the sale date for any purchases.
4. Mark the date 30 days after the sale. Until then, do not buy the security or options on it in any account.
5. If you want to stay invested, buy something that is clearly different from what you sold.

The safest approach is straightforward: 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 tax-loss move that affects IRAs or a spouse’s portfolio, it is worth having a CPA review the trades; the wash-sale rule is one of nine IRS traps we outlined in a free guide to the quiet rules that can drain retirement accounts.