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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.

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Wealthfront prepared this article for informational purposes and not as an offer, recommendation, or solicitation to buy or sell any security. Wealthfront and its affiliates may rely on information from various sources we believe to be reliable (including clients and other third parties), but cannot guarantee its accuracy or completeness. See our Full Disclosure for more important information.

Wealthfront and its affiliates do not provide tax advice and investors are encouraged to consult with their personal tax advisor. Financial advisory and planning services are only provided to investors who become clients by way of a written agreement. All investing involves risk, including the possible loss of money you invest. Past performance does not guarantee future performance.