What is a “wash sale” and why does it matter?

A wash sale results from the sale of an investment when a substantially identical investment was purchased within 30 days before or after the sale date. The IRS generally prohibits claiming losses on wash sales.

Wealthfront’s tax-loss harvesting algorithms manage your accounts in an attempt to avoid wash sale issues within your Wealthfront investment portfolio. This includes in most instances tracking as closely as possible both sale and purchase timing, as well as choosing alternate ETFs that we believe are not substantially identical to your primary (initial) ETFs. The result of a wash sale is that your loss will be disallowed for tax purposes and added to the cost basis of the securities you repurchased. This can make filing your taxes more of a hassle, but usually has little effect on the overall investment strategy of your account.

Another common occurrence that would cause your Wealthfront account to incur wash sales is if you request a withdrawal. Based on your withdrawal instructions, we will generally place the trades required to meet your withdrawal request immediately even if it create wash sales, rather than wait until the 30 day wash sale window expires before trading your account to get you your money. Your 1099 tax document will include the details of any wash sales in your account.

Please note that if you use other investment services or brokerage accounts that also trade the same ETFs held in your Wealthfront portfolio, you may increase your chances of incurring a wash sale.   

We don’t provide tax advice. For more on wash sales, please see the IRS website or consult your tax advisor.