The wash-sale rule and monthly ETF rotation: when a loss does not count
A tactical strategy sells and buys often, and it may buy back an asset it sold at a loss a few weeks earlier. In a US taxable account that can trigger the wash-sale rule. This guide is general education, not tax advice.
What the rule says
If you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale (a 61-day window), the loss is generally disallowed for now. It is not lost forever: it is added to the cost basis of the new position and recovered when that position is eventually sold.
Why rotation strategies run into it
Imagine the signal moves you out of an ETF at a loss in March and back into it in April. The repurchase falls inside the 30-day window, so the March loss is deferred. With monthly signals, a position that flips in and out can trigger this regularly.
What counts as substantially identical
The IRS has not published a precise list. Generally, the same security is covered. Two different funds tracking the same index are a grey area, and many investors treat funds from different providers that follow different indexes as distinct. This is an area where professional advice is worth having.
Practical points
- The rule applies across your accounts, including IRAs and a spouse's accounts: a repurchase in an IRA can disallow a loss in a taxable account.
- It does not apply inside the IRA itself, because losses there are not deductible anyway.
- Gains are not affected. The rule only disallows losses.
- Brokers report basis adjustments for identical securities in the same account, but they cannot see your other accounts.
How to keep clean records
- Keep a trade log: date, product, shares, price, commission.
- Mark any sale at a loss and check 30 days either side.
- Note when the strategy signals a return to the same ETF.
- If you run the strategy inside an IRA, this problem disappears (IRA guide).
Does the strategy need to change?
No, and it should not. Changing signals to avoid a tax rule is changing the strategy halfway. If the tax friction bothers you, use a retirement account or a lower-turnover strategy.
Frequently asked questions
Does the rule apply to ETFs?
Yes, it applies to stocks, bonds, ETFs and other securities.
Does it apply if the sale was a gain?
No. Only losses are affected.
Is this tax advice?
No. Rules and interpretations change. Confirm with the IRS or a tax professional.