Wash Sale Rule: What Investors Need to Know

The wash sale rule can disallow a loss deduction when substantially identical stock or securities are acquired within 30 days before or after a loss sale. Investors considering tax-loss harvesting should review purchases across accounts, including IRAs, before trading. The treatment of a disallowed loss depends on the replacement account.

Key Takeaways

A loss sale and substantially identical purchase can trigger the rule.

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✓ Applies 30 days before AND after the sale

A basis adjustment generally applies, except for IRA replacements.

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✓ Different accounts don't avoid the rule

Understanding the Basics

The wash sale rule generally disallows a deduction for a loss on stock or securities when substantially identical investments are acquired within 30 days before or after the sale. The 61-day window includes the sale date.

Key Considerations

A loss sale and substantially identical purchase can trigger the rule.
Applies 30 days before AND after the sale
A basis adjustment generally applies, except for IRA replacements.
Different accounts don't avoid the rule

Steps to Get Started

1. Step 1: Assess your current situation
2. Step 2: Gather information and research options
3. Step 3: Consult with Brett Henderson for personalized guidance
4. Step 4: Develop your customized strategy
5. Step 5: Implement and monitor your plan

Frequently Asked Questions

What triggers a wash sale?

A loss sale followed or preceded within 30 days by acquisition of substantially identical stock or securities can trigger a wash sale. A purchase in your IRA or Roth IRA can also disallow a taxable-account loss.

What happens if I violate the wash sale rule?

The loss is disallowed for the current sale. It generally increases the replacement investment's basis, deferring recognition. If your IRA or Roth IRA acquires the replacement, the disallowed loss does not increase its basis.

Source: IRS Publication 550, Wash Sales - https://www.irs.gov/publications/p550

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Article by Brett R. Henderson, CIMA®, CPFA®, CRPS®, CEPA®, AIF®, CLU®, BFA™. A fiduciary financial advisor has a duty to act in your best interests when providing investment advice.

Brett R. Henderson is a registered representative of Vanderbilt Securities, LLC and investment advisor representative of Consolidated Portfolio Review. Securities offered through Vanderbilt Securities, LLC. Member FINRA, SIPC. Advisory Services offered through Consolidated Portfolio Review.

Tax planning is not just about reducing your current tax bill - it can also help optimize your lifetime tax burden. Strategies such as Roth conversions, withdrawal sequencing, and tax-loss harvesting may help reduce taxes and preserve more of your retirement savings, depending on your individual circumstances.

How Do Different Strategies Compare?

Traditional IRA / 401(k): Withdrawals are generally taxable except for after-tax basis. RMD timing depends on birth year and account type; some current-employer plans allow deferral until retirement, with exceptions. Roth IRA / Roth 401(k): Qualified withdrawals are tax-free. Neither requires lifetime RMDs for the owner; beneficiary rules differ.

Taxable brokerage: Income and realized gains may be taxable. A withdrawal sequence should reflect your overall circumstances.

HSA: Withdrawals used for qualified medical expenses are tax-free. Other withdrawals may be taxable and subject to additional tax.

What Tax Planning Actions Should You Prioritize?

Effective tax planning requires proactive strategies implemented throughout the year, not just during tax season. Consider these priority actions:

Review your withholding and estimated payments: The IRS Tax Withholding Estimator can help you determine if your current withholding is appropriate to avoid surprises at tax time.
Evaluate Roth conversion opportunities: Compare current and potential future taxes before converting. Qualified Roth IRA distributions are tax-free, but conversion income and withdrawal rules can affect the outcome. Review the amount with your tax advisor.
Harvest tax losses: Tax-loss harvesting can be an effective strategy for potentially reducing taxes on investment gains in taxable accounts.
Review retirement contributions: Pre-tax workplace contributions may reduce current taxable wages. Traditional IRA deductibility depends on eligibility, income and workplace-plan coverage; Roth contributions are not deductible.
Review charitable giving: Discuss whether bunching donations or using a donor-advised fund fits your goals. Deductibility depends on applicable limits, eligibility and whether you itemize.

Effective tax planning can help individuals and families identify opportunities to reduce their tax burden and improve after-tax outcomes.

How to Create a Tax-Efficient Retirement Plan: Step-by-Step

Implementing a tax-smart strategy requires a systematic approach:

1. Step 1: Map your income sources. Identify all current and projected retirement income streams, including Social Security, pensions, 401(k)/IRA distributions, and taxable investment income.
2. Step 2: Estimate your future tax bracket. Project your retirement income to determine which federal and state tax brackets you will likely fall into, using resources from the IRS.
3. Step 3: Evaluate Roth conversion opportunities. Compare the taxable conversion amount, available funds to pay taxes, and potential future tax treatment. Savings are not assured.
4. Step 4: Evaluate tax-loss harvesting. Review whether realizing investment losses fits your circumstances and the applicable tax rules with your tax advisor.
5. Step 5: Plan withdrawals. Compare account tax treatment, required distributions, cash needs and other circumstances.
There is no single withdrawal order that is appropriate for everyone.
6. Step 6: Review charitable options. Ask your tax advisor whether you qualify for a direct IRA-to-charity distribution and how the rules and limits apply to any required distribution.
7. Step 7: Review periodically with your advisors. Revisit your circumstances and applicable tax rules. A review may identify changes to consider but cannot assure savings or prevent every mistake.

Tax-efficient retirement planning may help reduce the taxes you pay throughout retirement, depending on your individual circumstances. Book your tax strategy session.

Wash-sale review and primary sources

Before a loss sale, review recent purchases and planned repurchases, including automatic dividend reinvestments and IRA activity. Ask your tax advisor how the wash-sale rules and any basis adjustments apply to your transactions.

IRS Publication 550: Investment Income and Expenses (Wash Sales)

https://www.irs.gov/publications/p550

IRS Publication 590-A: IRA contributions and conversions

https://www.irs.gov/publications/p590a

IRS Publication 590-B: IRA distributions

https://www.irs.gov/publications/p590b

IRS Publication 969: Health Savings Accounts

https://www.irs.gov/publications/p969

IRS: Retirement plan and IRA required minimum distributions FAQs

irs.gov/retirement-plans/retirement-plan-and-ira-required-minimum-distributions-faqs