Wash-sale considerations
As mentioned above, it’s important not to engage in wash sales when performing tax-loss harvesting. While a full discussion of the IRS wash-sale rule is beyond the scope of this article, here are some key considerations to keep in mind.
In general, the IRS wash-sale rule states that where a sale or other disposition of shares of securities results in a loss, that loss is disallowed if you’ve acquired (including through an issuer’s dividend reinvestment program) substantially identical securities within a 61-day period beginning 30 days before the date of the sale and ending 30 days after the sale. If you acquire substantially identical replacement shares, the loss would be deferred or, in some cases, disallowed entirely.
The IRS wash-sale rule applies not only to purchases of substantially identical securities within the same account, but also to purchases of substantially identical securities acquired in other accounts owned or controlled by you or your spouse or partner, including tax-deferred accounts such as IRAs and 401(k) plans.
Additionally, accounts owned by your spouse, partner, or other entities you own or control are also subject to the IRS wash-sale rule. At tax-reporting time, you’re obligated to accurately report on your tax return any capital gains and losses realized for the year, taking into account any wash sales that occurred in your overall investment portfolio that year.
Further, current tax laws aren’t always clear around what constitutes a substantially identical security for purposes of the wash-sale rules, particularly in the context of passively managed index funds or ETFs (exchange-traded funds). Since tax-loss harvesting can be complex, we recommend you consult a tax and/or legal advisor about your individual situation before engaging in this strategy. For more information about the risks associated with tax-loss harvesting, see below.**
Be sure to check out theIRS websitefor helpful information about tax-loss harvesting. The treatment of capital gains and losses, including the ability to offset gains with losses, is subject to current tax provisions. Please seeIRS Publication 550,Investment Income and Expenses, for additional information. Tax-loss harvesting may also affect your state or local taxes.
