Completely lost trying to understand Wash Sale rules for stock trading

Thanks for the explanation. So if I own multiple ETFs that track different indexes but might have some overlapping stocks (like an S&P 500 ETF and a Total Market ETF), would selling one at a loss and buying the other trigger a wash sale? Also, does this apply across different account types? Like if I sell a stock at a loss in my regular brokerage account but then buy it in my Roth IRA within 30 days?

ETFs tracking different indexes (like an S&P 500 ETF and a Total Market ETF) would generally not be considered "substantially identical" even though they have overlapping stocks. The key is that they follow different indexes with different compositions, so selling one at a loss and buying the other typically wouldn't trigger a wash sale. Yes, wash sale rules apply across different accounts, even retirement accounts. If you sell a stock at a loss in your taxable brokerage account and then buy the same stock in your Roth IRA within the wash sale window, it would trigger a wash sale. This is particularly problematic because the disallowed loss gets added to the cost basis in your Roth IRA, where it effectively disappears since Roth IRA withdrawals aren't taxed.

Does it work for options trading too? I've heard wash sales get even more complicated with options on the same underlying security.

I'm hesitant to connect my brokerage accounts to any third-party service. How secure is it? And does it just identify wash sales or does it actually help with filing taxes too?

Yes, it absolutely works for options trading too. The tool recognizes when options are on the same underlying security and applies the wash sale rules appropriately. It's been a lifesaver for me because options trading creates even more complex wash sale scenarios than just trading stocks. Regarding security, I was initially concerned too, but they use bank-level encryption and read-only access to your accounts, so they can't make any trades or withdrawals. They just analyze the data. As for tax filing, it identifies all wash sales and generates reports that you can import into most tax software or give to your accountant. It doesn't file taxes directly but makes the reporting part much easier.

How exactly does this service work? Do they just call the IRS for you or what? Seems weird that they could get through when regular people can't.

Sounds like a scam. If they really had some secret way to get through to the IRS, wouldn't the IRS shut it down? And what do they do with your tax info? I'd be super cautious about services like this.

They don't call the IRS for you - it's more like a service that holds your place in line. What they do is use an automated system to continuously call the IRS using their algorithm that knows exactly when to call, and then when they get through, they immediately connect you to the call. That's why regular people can't do it - most of us give up after being on hold for an hour. They don't actually access any of your tax information. You're the one who speaks directly with the IRS agent, and they're not on the call at all. They just make the connection and then drop off. I was skeptical too, but it's completely legitimate - they've even been featured in major financial publications.

Wait, so what if you buy in a 401k? Does that count too? My 401k automatically invests every two weeks and I have no control over the timing.

Yes, it applies to 401k accounts too. The wash sale rule doesn't distinguish between account types - it's designed to prevent you from claiming tax losses while maintaining your economic position in the security. For your 401k automatic investments, this is trickier. If your 401k is buying individual stocks that you also trade in your taxable account, those automatic purchases could potentially trigger wash sales. However, if your 401k is investing in mutual funds rather than individual stocks (which is more common), then you're generally safe since most 401k plans invest in funds rather than individual securities. But if you have a self-directed 401k with individual stock purchases, you need to be careful about coordinating those with your taxable account trades.

I switched to TurboTax Premier specifically because it handles investment stuff better. It's still not perfect with wash sales, but it does identify most of them correctly when you import directly from major brokers. Just be warned that it's way more expensive than the regular version.

This is super helpful. So for example, if I want to tax-loss harvest QQQ in December, I shouldn't buy more QQQ in any of my accounts until February, right?

Exactly right. If you sell QQQ for a loss in December for tax-loss harvesting, you shouldn't buy QQQ again in ANY of your accounts (taxable or retirement) until at least 31 days later. So early February would be the earliest you could buy again without triggering a wash sale. Some people will buy a similar but not "substantially identical" ETF during that 30-day period to maintain market exposure. For example, selling QQQ (NASDAQ-100 ETF) and immediately buying VGT (Vanguard IT sector ETF). They're similar but track different indexes, so they shouldn't trigger the wash sale rule while giving you somewhat similar market exposure.

This is really helpful context about the IRS's intent behind the rule - that framing makes it much clearer why they structured it this way. The 61-day total window is something I definitely didn't realize initially. I'm curious about the tax professional recommendation - do you have any suggestions for finding someone who specifically understands active trading tax issues? I've talked to a couple of CPAs but they seemed pretty general and didn't really get into the nuances of wash sales across multiple accounts or with options trading. Also, for someone just starting to trade more actively, what's a reasonable threshold where you'd say "okay, now you really need professional help with this"? Like is it based on number of trades, dollar amounts, or complexity of strategies?

Great question about finding the right tax professional! I'd recommend looking for CPAs or EAs (Enrolled Agents) who specifically advertise experience with day traders or active investors. The National Association of Tax Professionals has a directory where you can search by specialty. Also, many trading forums and communities have recommendations for tax pros who "get it" when it comes to complex trading scenarios. As for thresholds, I'd say consider professional help if you're hitting any of these: - Making 100+ trades per year across multiple accounts - Trading options regularly (especially complex strategies) - Dealing with wash sales that span different account types - Your trading losses/gains are significant relative to your income (like 25%+) - You're doing any kind of tax-loss harvesting strategy The complexity matters more than pure volume though. Someone making 500 simple stock trades might be fine with good software, while someone doing 50 trades involving options, multiple brokers, and retirement accounts might really need professional guidance. I learned this the hard way - tried to DIY my taxes after a year of active trading and ended up paying way more than I should have because I missed several wash sale implications. The CPA's fee was easily offset by the tax savings they found.

This is exactly the kind of practical insight I was looking for! The DRIP issue is something I never would have thought about - I have dividend reinvestment enabled on several positions and could definitely see myself accidentally triggering wash sales that way. Your point about the IRS not providing a comprehensive list is really frustrating but makes sense why this is so confusing for everyone. The "different asset class" approach sounds smart even if it's not perfect for maintaining exposure. Better to be conservative and avoid any potential issues with the IRS. Do you know if there are any recent court cases or IRS rulings that have clarified what "substantially identical" means for modern ETFs? It seems like with so many new funds coming out that track slightly different but overlapping indexes, this is becoming an even bigger gray area than it was before. Also wondering - when you temporarily move to bonds or other asset classes during the 31-day period, do you have a go-to strategy for what to buy? Like do you stick with broad market bond ETFs or do you try to match the duration/risk profile somehow?