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Short answer: Under U.S. federal rules, selling ETF shares at a loss and buying substantially identical securities during the 30 days before or after the sale can create a wash sale. The loss is generally disallowed for the current deduction and added to the basis of replacement shares, deferring the tax effect. Buying a different ETF is not automatically safe or automatically a wash sale; whether two funds are “substantially identical” is fact-specific and is not categorically resolved for every ETF pair in IRS Publication 550 (2025).
This guide covers individual investors and U.S. federal income tax treatment in taxable accounts. State taxes, entity investors, and individualized tax advice can produce different results. Retirement accounts also require separate analysis because the taxable-account discussion does not apply to IRAs, 401(k)s, and other qualified plans in exactly the same way.
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What the ETF wash-sale rule does
The wash-sale rule applies when you sell stock or securities at a loss and acquire substantially identical stock or securities during the period beginning 30 days before the sale and ending 30 days after it. The rule can also apply to certain contracts or options to acquire substantially identical securities. The governing federal explanation is in IRS Publication 550 (2025).
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1Clear out junk files and repair common Windows errors2Scan for outdated or missing drivers - takes under a minute3Repair Windows errors before they cause bigger problemsThe rule is designed to prevent a current tax deduction when an investor has effectively maintained the same investment exposure. It does not prohibit the trade, and it does not make the economic loss disappear. Instead, the loss is generally disallowed on the current tax return and added to the basis of the replacement securities. The replacement shares’ holding period generally includes the holding period of the shares sold.
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IRS Publication 550 states: “You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.” That statement is from the Internal Revenue Service publication, not from a named individual.
The 30-day window
Count both directions from the loss sale. A purchase 15 days before the sale, the loss sale itself, and a purchase 20 days afterward all fall within the relevant period. You must review transactions before and after the sale, not just the order placed immediately afterward.
The rule concerns acquisitions of substantially identical securities. The IRS standard does not provide a categorical list that resolves every pair of ETFs. Two funds that track the same index might have similar economic exposure, but similarity alone does not establish the tax answer. Conversely, choosing a fund with a different name does not guarantee that the securities are not substantially identical. Treat fund-by-fund conclusions as fact-sensitive unless an authoritative source addresses the exact securities.
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- Options and contracts: Certain contracts or options to acquire substantially identical securities are included in the wash-sale rules.
- Spouse and controlled-corporation purchases: Publication 550 discusses purchases by a spouse and by a corporation controlled by the taxpayer. Review the publication’s conditions rather than assuming that a trade in another person’s account is outside the rule.
- IRAs and Roth IRAs: Publication 550 discusses purchases through these accounts. The tax treatment is not the same as simply moving replacement shares into a taxable account, so obtain account-specific advice before relying on a basis adjustment.
- Qualified retirement plans: The taxable-account rules in this article should not be applied mechanically to 401(k)s or other qualified plans.
What happens to the loss and the replacement basis
In a wash sale, the loss is generally deferred rather than erased. The disallowed amount is added to the basis of the replacement securities. When those replacement securities are eventually sold in a transaction that is not itself a wash sale, the higher basis can reduce the later gain or increase the later loss. The holding period of substantially identical replacement shares generally includes the holding period of the old shares, which can affect whether a later gain or loss is short-term or long-term.
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Keep lot-level records. A single ETF position may contain shares bought on different dates and at different prices. A wash-sale adjustment can attach to particular replacement lots, so an account-wide average may not be enough to reconstruct the correct basis.
Illustrative transactions
| Transaction pattern | Federal wash-sale issue | What to verify |
|---|---|---|
| Sell ETF shares at a loss; buy substantially identical shares 15 days later | Generally a wash sale; current loss deduction is disallowed and added to replacement basis | Replacement lots, dates, quantity, and any other purchases in the window |
| Buy substantially identical shares 20 days before selling the loss lot | Generally within the 30-day-before period | Whether the earlier purchase is substantially identical and which lots are involved |
| Sell at a loss; make no potentially matching purchase for 31 days afterward | The later purchase is outside the 30-day-after period, assuming no other covered acquisition occurred | All accounts, options, spouse transactions, and purchases before the sale |
| Sell one ETF at a loss; buy a different ETF tracking a similar index | Not automatically a wash sale and not automatically exempt | Whether the two securities are substantially identical under the facts |
| Sell at a loss; buy an option to acquire substantially identical securities | May be covered as a specified contract or option | The contract terms and the Publication 550 conditions |
The table describes the rule’s framework, not a determination for a particular pair of funds. The IRS material does not settle every ETF comparison.
Cost basis: the number that controls your gain or loss
Cost basis is generally what you paid for an investment, adjusted for items such as certain distributions and wash-sale additions. Your taxable gain or loss on a sale is determined by comparing proceeds with adjusted basis. For a wash sale, the disallowed loss increases the basis of the replacement shares, so the replacement lot—not merely the original lot—must carry the adjustment.
What Form 1099-B can show
For covered securities, your broker generally reports information on Form 1099-B. The form can include the acquisition date, whether the transaction is short-term or long-term, cost or other basis, proceeds, and a wash-sale loss reported in box 1g. The IRS describes these reporting fields in its guidance for traders and securities transactions at IRS Topic No. 429.
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Broker reporting is a starting point, not a guarantee that every circumstance has been captured. A wash-sale loss can remain nondeductible even when the broker did not report an adjustment. This can occur when relevant transactions are outside the broker’s reporting scope, including activity involving another account or person covered by the rule. Reconcile the form with your own confirmations and statements.
Distributions can change basis
Do not treat every ETF distribution as a dividend or as return of capital. Use the fund’s tax reporting and your tax documents to establish the character of each payment.
A return of capital, also called a nondividend distribution, generally reduces your basis. If those reductions bring basis to zero, additional amounts are handled under IRS reporting instructions rather than reducing basis below zero. The IRS explains this treatment in its guidance on mutual-fund costs and distributions at Mutual funds (costs, distributions, etc.). The same basis principle is relevant when an ETF reports a distribution as nondividend or return of capital.
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When are ETF taxes due?
Annual tax-return reporting
Investment income can include interest, dividends, capital gains, and other distributions. Realized ETF gains and losses and taxable distributions are generally reported for the tax year in which they occur, using the forms that apply to your situation. A sale does not create a tax merely because an account statement shows a change in value; an unrealized gain or loss is different from a realized disposition.
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Form 1099-B supplies disposition information when issued, while Form 1099-DIV may report dividends and other distributions. Gather those forms and the supporting trade records before completing the return. The IRS publication describing investment income and expenses is Publication 550.
Form 8949 and Schedule D
Form 8949 is used, as applicable, to list dispositions and make adjustments such as a wash-sale modification. The resulting capital gains and losses flow to Schedule D as instructed for your return. Follow the form instructions for how to enter proceeds, basis, adjustment codes, and amounts; do not assume the broker’s 1099-B entry can simply be copied when you have an adjustment the broker did not report.
Estimated payments are a separate question
Annual reporting and the timing of a payment during the year are not the same issue. Whether you need estimated tax payments, qualify for a safe harbor, or have a particular installment obligation depends on your total income, withholding, prior-year tax, and other facts. Publication 550 explains the types of investment income and how they appear on a return, but it does not establish a universal estimated-payment schedule for every investor. Use the current IRS estimated-tax instructions or a qualified tax professional for payment dates and safe-harbor calculations.
A practical ETF tax-reporting workflow
- Collect source documents. Download trade confirmations, account statements, Form 1099-B, Form 1099-DIV, and any corrected forms from each broker. Retain records for every account in which you can trade the relevant securities.
- Build a lot-level transaction list. For each sale, record the security, number of shares, acquisition date, sale date, proceeds, original basis, adjusted basis, and holding period. Separate lots instead of relying only on an aggregate position.
- Scan the 61-day period. For every loss sale, review the 30 days before and 30 days after. Include purchases, reinvested distributions, options or contracts, and transactions that may involve a spouse or a controlled corporation when the rule’s conditions apply.
- Assess substantial identity carefully. Do not label two ETFs safe or identical solely from their names or index descriptions. If the answer affects a material loss, document the facts and obtain professional advice on the specific securities.
- Reconcile broker adjustments. Compare the broker’s basis and box 1g wash-sale amount with your records. Investigate differences in dates, lot quantities, account coverage, and corporate actions. A missing broker adjustment does not automatically make a loss deductible.
- Account for distribution character. Match each payment to the fund’s tax reporting. Reduce basis for amounts reported as return of capital, and track when basis reaches zero.
- Prepare the tax forms. Report applicable dispositions and adjustments on Form 8949 and carry the capital-gain or capital-loss totals to Schedule D as instructed. Enter dividend and other distribution amounts from the appropriate information forms.
- Review payment obligations separately. After calculating the return, determine whether withholding and estimated payments cover the tax. Use current IRS estimated-tax guidance for installment dates rather than inferring a due date from the trade date.
Common errors and how to correct them
Counting only purchases after the sale
A purchase before the loss sale can be inside the 30-day window. Expand the review backward as well as forward, and include automatic reinvestments where they create acquisitions.
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Assuming a different fund name settles the issue
Fund names and marketing descriptions are not a legal test. The relevant question is whether the securities are substantially identical under the facts. The IRS guidance does not provide a universal ETF-pair chart.
Accepting the 1099-B without checking other accounts
Broker forms can omit transactions outside the broker’s reporting scope. Compare every relevant account and preserve confirmations so that a nondeductible loss is not claimed merely because box 1g is blank.
Ignoring holding-period changes
A replacement lot can inherit the old lot’s holding period when the wash-sale rule applies. Verify the short-term or long-term classification before transferring totals to the return.
Calling every distribution a dividend
Return-of-capital amounts generally reduce basis, while other distributions have different tax character. Use the tax form and fund reporting instead of the account statement’s generic “distribution” label.
Confusing a tax-year obligation with an immediate bill
The sale is reported for the applicable tax year. Whether money must be sent before the annual return is filed depends on estimated-tax and withholding rules specific to the investor; it cannot be determined from the wash-sale rule alone.
Recordkeeping checklist
- Trade confirmations showing security identifiers, dates, quantities, prices, and commissions or other transaction details.
- Lot-level basis schedules, including every wash-sale addition and the replacement lot receiving it.
- Statements for taxable, IRA, Roth IRA, and other accounts that could contain a relevant acquisition.
- Form 1099-B, including corrected versions, and the broker’s explanation of basis and box 1g adjustments.
- Form 1099-DIV and fund notices identifying dividends, capital-gain distributions, or return of capital.
- A written explanation for any adjustment you make on Form 8949 that differs from the broker’s report.
Keep these records long enough to support the basis of replacement shares and any later sale. A deferred loss can affect a future tax year, so deleting the original confirmation after filing the current return can leave you unable to substantiate the later basis.
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