People search tax-loss harvesting thinking the hard part is finding a position that is down. The hard part is the wash-sale rule. A sale at a loss is washed if you (or certain related accounts) buy a substantially identical security in the 61-day window: 30 days before the sale, the sale day, and 30 days after. Publication 550 writes that rule from Internal Revenue Code section 1091. A traditional IRA or Roth IRA purchase of the same security can take the loss off your taxable account. Harvested losses offset other capital gains first. Only $3,000 of leftover net capital loss can reduce ordinary income in a year ($1,500 if you file married filing separately). The rest carries forward. Tax-loss harvesting is a cost-basis reset that works only when you keep market exposure without triggering a wash sale.
What is tax-loss harvesting?
Tax-loss harvesting is selling a capital asset at a loss in a taxable account so that loss can offset other capital gains, then staying invested in a replacement that stays outside the substantially identical test.
You sell the lot. You report the sale on Form 8949. You summarize capital gains and deductible capital losses on Schedule D. The harvested amount is a capital loss. A later purchase that is substantially identical, inside the window, can take that loss back off the return.
The strategy lives in a taxable brokerage account. A sale inside an IRA stays off Form 8949. Tax strategies for high-income W-2 employees places this sale on a year-level projection, next to wages, vests, and other gains, because the loss only helps after those other numbers are known.
How does the wash-sale rule erase a harvested loss?
A wash sale occurs when you sell or trade stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities, acquire them in a fully taxable trade, acquire a contract or option to buy them, or acquire them for your IRA or Roth IRA.
That is the Publication 550 list. The window is 61 days because the sale day sits between the two 30-day sides. Publication 550 also treats a purchase by your spouse, or by a corporation you control, as your purchase.
If the loss is disallowed and the replacement sits in a taxable account, you add the disallowed loss to the cost of the new shares. Publication 550 uses that add-back to postpone the deduction until those new shares are disposed of. The holding period of the old shares tacks onto the new ones.
Form 8949 instructions use code W in column (f) for a nondeductible wash-sale loss. You enter the disallowed amount as a positive number in column (g). A broker 1099-B can show a wash-sale amount in box 1g. That box is the broker’s view of that account. Your IRA, your spouse’s account, and a purchase at another firm sit outside it.
A dividend reinvestment of the same ticker inside the window is a purchase.
What does substantially identical mean for stocks and ETFs?
Publication 550 says you must consider all the facts and circumstances in your particular case. Ordinarily, stocks or securities of one corporation count as a different security from those of another corporation.
Same ticker, same issuer, and same share class is the clear wash. Preferred stock or convertible bonds of the same issuer can be substantially identical to that issuer’s common stock when relative values, price changes, and conversion terms line up. Publication 550 gives that convertible case.
The IRS publishes no list of ETF pairs that are safe. Two funds from different issuers are ordinarily different corporations under the Pub 550 sentence above. Two funds that track the same index still need that facts-and-circumstances read. A popular swap of one S&P 500 ETF for another is a practice. Publication 550 is the test.
Warrants for the same corporation’s common stock can be substantially identical to that common stock. Selling warrants at a loss and buying the common stock is a wash only if those warrants and that stock are substantially identical under the same facts-and-circumstances test.
Can a purchase inside an IRA trigger a wash sale?
Yes. Publication 550 lists an IRA or Roth IRA purchase of substantially identical stock as a wash-sale acquisition.
Revenue Ruling 2008-5 holds that the taxable-account loss is disallowed under section 1091, and that the IRA’s basis stays unchanged under section 1091(d). In a taxable replacement, the disallowed loss raises the new basis, so the economic loss is still in the position. In an IRA, the disallowed loss stays off the IRA’s basis. The harvested deduction stays disallowed.
The ruling’s facts are a sale in a taxable account and a purchase of substantially identical shares inside the individual’s IRA or Roth IRA within 30 days. Different brokers leave the result the same. The statute looks at the taxpayer’s acquisitions.
How do harvested losses hit your tax return?
Harvested losses offset other capital gains first. Topic 409 then limits the leftover net capital loss that can reduce ordinary income: the lesser of $3,000 ($1,500 if you file married filing separately) or the net loss on Schedule D line 16. You claim that allowed amount on Form 1040. Anything above the limit carries forward.
Topic 409 also classifies each sale as short-term or long-term. You generally count from the day after you acquired the asset through the day you sold it. A net short-term gain is taxed as ordinary income. A net long-term gain can use the capital-gains rates Topic 409 publishes for that year. A wash sale that tacks the old holding period onto the new shares can change that later classification.
A realized gain still raises AGI. That lift can move MAGI tests and the net investment income tax switch on Form 8960. A usable capital loss can shrink those piles. A washed loss stays off those piles.
Buy, borrow, die is the other direction: you avoid the sale so the gain never appears. A harvest is a sale you chose, on purpose, because the loss is the item you want on Form 8949.
What is a cost-basis reset?
A clean harvest outside the wash-sale window gives you the capital loss now. The replacement starts at what you paid for it. That is the basis reset: the old lot is closed, the new lot has its own cost.
A wash sale in a taxable account moves the disallowed loss onto the new shares. You stay invested. The deduction waits. Publication 550’s add-back keeps that version a deferral.
The $3,000 ordinary-income cap ($1,500 if you file married filing separately) is why a large harvest often leaves most of the loss for later years. Topic 409 sends the unused amount forward on the Capital Loss Carryover Worksheet in Publication 550 or the Schedule D instructions.
Robo-advisors run harvests inside one taxable sleeve. Section 1091 looks at your IRA, your Roth IRA, your spouse, and a corporation you control. Automated trades still use that statute. How much a financial advisor costs puts typical robo pricing around 0.25% of assets. That fee is for the sleeve. The 61-day window applies.
How does Nino model capital gains, losses, and wash-sale risk?
Nino maps taxable lots, replacement trades, and related accounts on the same household file, with a CFP and a CPA on those numbers for 1 flat annual fee.
The work is whether a sale is a usable loss, whether a replacement or an IRA purchase sits in the 61-day window, and how the leftover hits the $3,000 ordinary-income line versus carryforward.
Book a demo if you want that Form 8949 map before you sell. Every Advisor Plan includes a 30-day money-back guarantee.