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When it comes to investing, couples often focus on long-term growth, risk tolerance, and retirement goals. But there’s one area where misalignment can quietly sabotage your plans: taxes. Specifically, the IRS’s wash-sale rule. If you and your spouse aren’t in sync, a well-meaning trade could disqualify valuable tax losses. Let’s break it down.
The Wash-Sale Rule and Why Couples Should Care
The IRS wash-sale rule disallows a capital loss deduction if you sell a security at a loss and buy the same or a “substantially identical” one within 30 days before or after the sale. But here’s the snag: this rule doesn’t just apply to you—it applies to your spouse, too. For married couples filing jointly, trades across separate accounts can still trigger the rule. It’s a technicality with real financial consequences.
What Is the Wash-Sale Rule?
In simple terms, the wash-sale rule stops investors from claiming a loss on a security if they haven’t truly exited the position. The IRS wants to prevent people from gaming the system—selling a stock to capture a tax break and then immediately buying it back. This rule applies to individual accounts, jointly filed couples, and even retirement accounts like IRAs. If you buy back the same (or very similar) security within 30 days, your loss is disallowed.
How Spouses Can Accidentally Trigger the Rule
Even if you and your spouse have separate brokerage accounts, the IRS looks at your household as one taxpayer. That means if you sell shares of a mutual fund at a loss in your account, and your spouse buys that same fund within the 30-day window in theirs, the loss can be disallowed. Many couples don’t realize their trades can impact each other’s taxes this way—especially if they’re not coordinating.
What Counts as a ‘Substantially Identical’ Investment?
This is where things get tricky. Selling one share of XYZ ETF and buying it back within 30 days is clearly a wash sale. But what if you sell a mutual fund and buy an ETF tracking the same index? The IRS doesn’t offer a hard-and-fast definition of “substantially identical,” but generally, securities that track the same index or have nearly identical holdings are considered too close for comfort.
Examples:
- Selling SPDR S&P 500 ETF (SPY) and buying Vanguard S&P 500 ETF (VOO) may trigger a wash sale because both track the exact same index.
- Selling a tech-focused mutual fund and replacing it with a tech ETF holding many of the same stocks could also be considered substantially identical.
- Switching from an S&P 500 index fund to a total market index fund might reduce your risk, but still deserves caution.
When in doubt, assume the IRS might consider two funds “substantially identical.” It’s safer to choose something clearly different to avoid losing the tax benefit.
Why the Wash-Sale Rule Matters for Retirement Planning
Tax-loss harvesting—selling investments at a loss to offset capital gains—is a powerful tax strategy, especially for retirees with taxable accounts. But a disallowed loss due to a wash sale won’t just disappear—it gets added to the cost basis of the repurchased security. That means you lose the immediate tax benefit, which could increase your tax bill in the short term. In retirement planning, where timing matters, this can ripple into your overall withdrawal and tax strategy.
Smart Strategies to Avoid the Wash-Sale Rule
The good news? Avoiding wash-sale issues is doable with some simple coordination. Here are some smart steps to consider:
- Communicate with your spouse before making any trades involving losses. A shared spreadsheet or calendar can help track timing.
- Use different, non-identical securities to maintain exposure—swap similar funds rather than repurchasing the exact same one.
- Wait at least 31 days before buying the same or a substantially identical security to ensure the loss is allowed.
- Leverage tax-aware investment tools or platforms that flag potential wash-sale conflicts across household accounts.
- Work with a fiduciary financial advisor who monitors your total tax picture and investment strategy.
By implementing these steps, you can avoid costly tax mistakes while keeping your investments aligned with your goals. A fiduciary financial planner can help ensure your entire household is tax-efficient.
Tax-Advantaged Accounts and the Wash-Sale Rule
Yes, even IRAs and 401(k)s can get you in trouble here. If you sell a stock for a loss in your taxable brokerage account and repurchase it in your IRA within 30 days, the IRS still considers that a wash sale. But here’s the kicker: you don’t get to add the disallowed loss to your IRA’s cost basis. That loss is gone forever. To preserve your losses for tax harvesting, make sure the buying and selling happens in taxable accounts only.
What to Do If You Trigger the Rule
If you accidentally trip the wash-sale rule, the loss doesn’t vanish—it’s added to the cost basis of the new security you bought. That means you’ll get the tax benefit later, just not this year. Keep detailed records and make sure your tax software or preparer adjusts for this change. The IRS expects consistency here, so don’t leave it to chance.
FAQ: Common Wash-Sale Questions
Can I repurchase a different fund in the same category and still harvest the loss?
Possibly—but be cautious. Swapping a large-cap index fund for another tracking the same index (like SPY and VOO) may be flagged as substantially identical.
Does the wash-sale rule apply to crypto?
As of now, it does not. Cryptocurrency is not classified as a security under current IRS definitions—but this could change with future legislation.
What happens to the disallowed loss?
It gets added to the cost basis of the replacement security. That means you can still benefit from the loss—just not immediately.
Do robo-advisors or tax software track wash sales?
Most modern platforms do, especially if they include tax-loss harvesting features. Still, it’s wise to double-check if you or your spouse use multiple brokerages.
Does the rule apply to dividends or reinvested distributions?
Yes. Automatic reinvestments that occur within the 30-day window can trigger a wash sale if they involve substantially identical securities.
Better Together—Especially at Tax Time
When it comes to investing and tax planning, communication really is key. Spouses should regularly review investment strategies and coordinate trades—especially during periods of market volatility. The wash-sale rule is just one example of how the IRS treats married couples as a unified financial entity. Don’t let a simple oversight cost you money.
Take action:
- Talk to your spouse before making loss-harvesting trades
- Use different but non-identical securities to preserve exposure
- Track trades across accounts or work with a fiduciary financial advisor
- Be cautious with IRAs and retirement accounts
- Double-check your tax software or CPA’s wash-sale reporting
With the right approach, you and your spouse can stay in sync—and keep more of what you’ve earned.
