Wash sales in depth

For a more succinct overview of wash sales, click here.

What is a wash sale?

When you sell an investment for a loss in a taxable account, you cannot buy that investment (or one “substantially identical”) 30 days before or after the sale (which creates a 61-day no-trade window), in any account within the same household.

What is “substantially identical?”

With individual securities, it is a little more straightforward: you can’t sell a security (e.g. AAPL) at a loss and then buy back in within 30 days. You could, however, buy AAPL and sell MSFT at a loss within 30 days--these are two wholly different companies. 

Similar logic applies to different share classes of the same security. If an investor sells BRK-A for a loss and then buys BRK-B within 30 days, that would be considered a wash sale violation.

Where it gets trickier is with mutual funds and ETFs that overlap, but are not identical. The IRS has not provided definitive guidance on what makes two mutual funds or ETFs substantially identical. See the FAQ below for more information on our mutual fund and ETF trading logic.

Which accounts trigger a wash sale?

A wash sale occurs when an investment is sold for loss in a taxable/non-qualified (NQ) account and also gets purchased by the client 30 days before or after the sale. Importantly, the purchase triggers a wash sale regardless of where it takes place.

This applies to every account under the same household. So if a fund is sold for a loss in your client’s NQ account and purchased in their spouse’s 401(k), that would constitute a wash sale.

What are the consequences of a wash sale?

The immediate impact of a wash sale is the loss does not count as a tax deduction. Subsequent consequences arise as well, but the specifics depend where the purchase took place.

Example 1: Buy and sell in the same NQ

Scenario 1: partial sell

• A client purchases 10 shares of ABC fund on June 1st for $10/share.
• On June 15th, the client sells 5 shares of ABC fund for $9/share.

Consequence:

• The entire loss on the 15th is a wash sale and is not a tax deduction. Rather,
• The loss of $5 (5 shares * $1/share) is used to adjust (i.e. increase) the cost basis of the remaining shares of ABC fund in that account.
• The custodian automatically performs this adjustment and reflects this on the client's 1099.
• This means the client doesn’t permanently lose the loss, they just won’t realize the loss until they sell the other funds in the future.

Scenario 2: partial sell

• A client is purchasing 10 shares of ABC fund every month (on the 1st) and has been doing so for quite some time.
• Next month, the client sells 15 shares of ABC fundf for a loss on the 15th.

Consequence:

• The loss incurred on 10 of the 15 shares is a wash sale and therefore not a tax deduction . And, like Scenario 1 above, the loss is used to adjust the cost basis of the remaining shares of ABC fund.
• The loss incurred on the other 5 shares is something the client can realize on their year-end taxes.
• The custodian automatically performs the adjustment and updates the client’s 1099.
  • (Note: if the client were to purchase additional shares of ABC the following month--within 30 days of the loss--that would result in another wash sale. However, Symplany's trade logic prevents subsequent purchases for 30 days after a loss).

Scenario 3: full sell

• A client purchased 10 shares of XYZ fund for $10/share
• Less than 30 days later the client sells all 10 shares for $8/share

Consequence:

• The client’s account statement shows that this was a wash sale
• However, the client does get to realize the $20 loss (10 shares * $2/share).
  • Since there are no shares remaining that can have a cost basis adjustment, the client is allowed to realize the full loss amount.
• The custodian automatically adjusts the 1099.

Example 2: Buy and sell between two different NQ accounts

When an investment is sold for a loss in one NQ account and purchased in a separate NQ, this requires cost basis adjustments similar to scenarios 1 and 2 above. However, this is an extremely difficult adjustment to make. It is a cumbersome process that will require you to reach out to your custodian.

Suggestion: rather than open multiple NQ accounts for a client, we recommend taking advantage of the multi-bucket feature

Example 3: Buy and sell between a Q and NQ account

When an investment is sold for a loss in a NQ account and purchased in a Q account within 30 days, the loss is permanently disallowed (❌). It cannot be reported as a deduction now (or at any point in the future!).

Although your custodian is not monitoring this type of activity (or activity between two separate NQ accounts, for that matter) and the IRS likely won’t know it occurred, it is still a violation of the wash sale rule and could be an issue in the event of an audit.

Symplany will not place automatic trades that create a wash sale in these scenarios. Any advisor-initiated trades that trigger a wash sale violation receive a warning message prior to trade confirmation (continue reading for more information on Symplany's trading logic).

Symplany’s trading logic

Symplany’s trading logic prevents a wash sale from occurring whenever possible.

When buying a fund

• Symplany does not buy a fund in any account for 30 days after it was sold for a loss in a client’s NQ account (🛑).
• If possible, Symplany will instead buy a replacement fund (🔄).
• If a replacement fund is not available (or if buying the replacement would create its own wash sale violation), Symplany will leave the funds in cash until the 30-day wash sale window has passed.

When selling a fund

• Symplany prohibits automatically selling a fund for a loss in a NQ for 30 days after buying it in any other account (🛑).
  • Unless you are selling in the same NQ, in which case the custodian will update the account and adjust the cost basis automatically (👍).

Note: Symplany only has visibility to accounts listed under the same household and is not responsible for outside trade activity. See FAQ below.

Manual trade requests

If an advisor initiates a trade (e.g. makes a withdrawal request or rebalances an account), Symplany will calculate trades and provide a warning message to the advisor if the trade creates a wash sale violation:

• A simple wash sale (⚠️) is when the sell occurs in the same NQ where the purchase took place.
  • If the fund is being liquidated, the client gets to realize the entire loss.
  • If the fund is being partially sold, the custodian automatically adjusts the cost basis for the remaining funds and updates the 1099.
• A disallowed wash sale (❗️) is when a fund is sold for a loss in a NQ less than 30 days after it was purchased in a different account.
  • Any losses realized cannot be written off for the client.
  • The custodian will not adjust anything for the client and their 1099 will incorrectly indicate the client realized losses.

Required trade activity

Your custodian does not allow an account to have a debit amount and in that situation Symplany is forced to rebalance the account. Much like an advisor-initiated trade request, this can result in a simple or disallowed wash sale.

What is being tracked by Symplany?

• Specific securities
  • Symplany prohibits any trades that buy and sell the same fund or share classes of the same security (e.g. buying and selling SPY, buying and selling BRK-A and BRK-B, or buying VUG and selling VIGAX).
• Mutual funds and ETFs
  • Symplany is not monitoring funds with unique CUSIPs or Fund IDs that could potentially be "substantially identical." For example, if a client recently sold SPY in their NQ account, but their investment strategy calls for more VOO, Symplany would allow a purchase of VOO (even if it was within 30 days of the sale of SPY). The IRS has not given clear guidance on what makes a mutual fund or ETF "substantially identical" to another. Read our FAQ below for more information.
• Specific accounts
  • Symplany monitors trade activity across all FLD accounts under the client household.
  • **Note: If you have spouses entered as separate households in FLD (e.g. one client under the name “John Doe” and another under “Jane Doe”), Symplany is not monitoring activity across these separate households. You should merge these clients into a single household.
  • Symplany also does not have visibility into external client accounts (e.g. an employer plan or even a non-FLD Spectrum account). It is the client’s responsibility to report wash sale violations to the IRS stemming from activity in external accounts

Neither the IRS nor your custodian have an easy way to track whether there was a wash sale due to two funds being substantially identical. The same goes for an identical security bought and sold in separate accounts. This doesn't preclude your client from getting audited down the road and being held accountable for prior wash sale violations.

How to mitigate wash sale situations

There are two practical ways to significantly reduce the likelihood of a wash sale in your accounts:

☑️ Only open one non-qualified account per household

If your client has multiple goals, use the multi-bucket feature to invest different portions of the account in separate allocations.

☑️ Use a unique strategy in your non-qualified account

Use an investment strategy in your NQ containing funds that do not overlap with what you use in the client's other account(s).

If you’re currently using the same strategy (or strategies with overlapping funds) in both a NQ and Q account, consider:

• Switching the strategy in the Q account(s) since that doesn’t trigger a taxable event. OR
• Switch the strategy in the NQ account and use the gain locks feature to limit capital gains.

FAQ

Q: Is it considered a wash sale if trade activity took place in another account [e.g. a spouse’s 401(k)]?

A: Yes.

Q: Can Symplany monitor a client’s external accounts?

A: No. Symplany only has visibility to FLD accounts under the same client household. It is the client’s responsibility to report any wash sale violations to the IRS tied to activity in external accounts.

Q: Will Symplany place trades that trigger a wash sale violation?

A: For the most part, no. There are two exceptions:

1. An advisor can always sell funds. If the advisor requests a trade (e.g. a withdrawal or rebalance), Symplany will calculate trades, even if they result in a wash sale. Symplany displays a warning message on the trade summary page before the advisor can confirm the trades.
2. Your custodian doesn't allow for an account to have a debit. In order to fix a debit, Symplany may place trades that result in a wash sale.

Q: How does Symplany define “substantially identical"?

A: Although the rules are clear when it comes to individual stock positions (see pp.56-57 of IRS Publication 550), the IRS hasn't provided a clear definition of "substantially identical" when it comes to mutual funds or ETFs.

We have taken a fairly conservative approach in this regard. We don't buy back into a fund after it has been sold for a loss (nor do we allow selling a fund for a loss if it has been purchased in the last 30 days). In addition, our replacement funds (1) typically track a different index than the primary fund and (2) have less than a 70% overlap in underlying holdings.

Q: What are replacement funds and how do they work?

A: Click here for more information on replacement funds.

Q: How do wash sales impact tax-loss harvesting?

A: Symplany will not harvest losses in an account if doing so violates our wash sale logic.

This article is not intended to provide accounting, legal, or tax advice. This information is broad in scope and has been prepared for informational purposes only. You should consult with an accounting, legal, or tax advisor before engaging in any transaction. We are not liable for any action you take--or fail to take--based on information on this site.