Wash Sale Rule and the Crypto Exemption (2026)

It is December 18 and your portfolio is down. You decide to harvest losses on your tech-heavy index fund to offset the realized RSU gains from earlier in the year. You sell on Friday, the market rallies Monday, and you buy back into the same fund before the close. Three months later, your CPA hands you back a 1040 with the loss disallowed, basis bumped on the replacement shares, and a tax bill that erased the entire purpose of the move.

That is the wash sale rule under IRC Section 1091. It catches more Bay Area investors than any other tax-loss harvesting trap, and the version that hits an IRA is even worse: the loss is not deferred, it is permanently gone.

The good news for crypto holders: as of the 2026 tax year, the wash sale rule still does not apply to digital assets. Cryptocurrency is treated as property under IRS Notice 2014-21, not as a security, and Section 1091 only catches "stock or securities." That gap is one of the few remaining tax advantages crypto still has over equities, and Congress has tried to close it three times. This guide covers how the rule works, where it bites, the crypto exemption while it lasts, and the substitution strategies our tax planning team uses with Bay Area clients.

What the Wash Sale Rule Actually Does

Section 1091 disallows a loss on the sale of stock or securities if, within 30 days before or 30 days after the sale, you acquire substantially identical stock or securities. The disallowed loss is not erased. It is added to the basis of the replacement shares, and your holding period in the replacement tacks on to the holding period of the shares you sold.

Net effect: the loss is deferred, not extinguished. You eventually get it back when you sell the replacement shares in a non-wash-sale transaction. But "eventually" can be years away, and if you keep rolling the position, decades. For a high-income Bay Area earner counting on the loss to offset this year's RSU vest or QSBS partial gain, deferral is functionally a tax bill.

The mechanics:

• Loss disallowed for the tax year of the sale
• Basis of replacement shares increased by the disallowed loss
• Holding period of the sold shares tacks to the replacement
• Broker reports the wash sale on Form 1099-B with code "W" (if within the same brokerage account)

The 61-Day Window

The wash sale window is 30 days before the sale, the day of the sale, and 30 days after. That is 61 days total. Any purchase of substantially identical stock anywhere in that window triggers the rule.

The "before" half catches people who do not realize they have already poisoned the well. If you bought additional SBUX shares on December 5 and then sold your older lot at a loss on December 15 to harvest the tax benefit, the December 5 purchase falls inside the 30-day-before window and triggers a wash sale on the loss, even though you never bought again after the sale.

It also gets worse: the rule applies across accounts. Purchases by:

• Your spouse (regardless of which spouse's account)
• A corporation you control
• Your IRA or Roth IRA (this is the painful one, see below)

all count as your acquisition for wash sale purposes. The IRS made the IRA position explicit in Revenue Ruling 2008-5. The IRS has not issued definitive guidance on spouse-IRA-to-spouse-taxable wash sales, but practitioners and tax advisors treat a spouse's IRA purchases as triggering the rule, consistent with the policy of Rev. Rul. 2008-5 and the cross-spouse attribution in §1091. The rule applies regardless of how you file (MFJ, MFS, or separate accounts). Brokers do not aggregate across spouses or across your taxable account and your IRA. They only flag wash sales inside the same account number. You and your CPA have to catch cross-account violations on your own.

What "Substantially Identical" Means

Section 1091(a) uses the phrase "substantially identical stock or securities" without defining it. The line is drawn by case law, IRS rulings, and decades of practitioner consensus. The general rule of thumb:

• Same stock = clearly substantially identical. Selling 100 shares of AAPL at a loss and rebuying 100 shares of AAPL within the window is a textbook wash sale. No room to argue.
• Different stocks in the same index = not substantially identical. Selling VTI (Vanguard Total Stock Market) at a loss and buying SCHB (Schwab US Broad Market) the next day is generally fine. Both track the broad US market, but they are different issuers, different funds, different securities.
• Options on the same stock = substantially identical. Selling AAPL shares at a loss and buying AAPL call options in the window will trigger a wash sale. The IRS has consistently held that an option to acquire substantially identical stock is itself substantially identical.
• Bonds from the same issuer with different maturity, coupon, or seniority = generally not substantially identical. Selling a 2030 Apple bond at a loss and buying a 2035 Apple bond usually does not trigger a wash sale. Selling and re-buying the exact same CUSIP does.
• Preferred and common stock of the same issuer = generally not substantially identical unless the preferred is convertible into common on terms that make them economically equivalent.

The grey zones are where practitioners earn their fees. Two S&P 500 index funds from different issuers (VOO vs. SPY vs. IVV) have been treated as not substantially identical for decades, even though they own essentially the same basket. The IRS has never issued formal guidance closing that gap, and the rule of thumb stands: different issuer plus different fund equals safe.

The IRA Wash Sale Trap (The Worst Version of the Rule)

Revenue Ruling 2008-5 made the IRS position unambiguous: if you sell a stock at a loss in your taxable brokerage account and then buy substantially identical stock in your IRA (or your spouse's IRA, or your Roth) inside the 61-day window, you trigger a wash sale.

Standard wash sale outcome: loss disallowed, basis added to replacement. IRA wash sale outcome: loss disallowed, and the basis adjustment goes nowhere. You cannot add basis to an IRA position, because IRA basis tracking does not work that way (Roth basis is tracked for contribution recovery only, not investment basis). The loss is permanently gone.

This is the most painful version of Section 1091, and it is also the one Bay Area clients trip on most. The pattern: an investor decides to harvest a $40K loss in their taxable Schwab account in December, then their automated IRA contribution at Vanguard for the same month buys a target-date fund holding the same underlying ETF, and the cross-account wash sale extinguishes the loss for life. Neither broker flags it because they only see one half of the transaction.

If you run tax-loss harvesting on equities, audit your IRA, your spouse's IRA, any auto-invest features, and any 401(k) brokerage windows for the same 61 days before and after. Pause auto-contributions if needed.

The Crypto Exemption (Still Standing in 2026)

Here is the headline benefit crypto holders still have over equity investors: the wash sale rule does not apply to cryptocurrency in 2026. Section 1091 catches "stock or securities," and the IRS has consistently treated cryptocurrency as property under Notice 2014-21, not as a security. No security, no Section 1091.

That means a crypto investor can do this legally:

1. Sell BTC at a loss on December 15
2. Rebuy BTC at essentially the same price on December 16 (or the same day)
3. Claim the loss in full on the current-year tax return
4. Hold the rebuy at the new lower basis until they want to sell

For a Bay Area crypto holder sitting on five-figure or six-figure unrealized losses, that maneuver is worth real money. A $50K harvested loss against $50K of short-term capital gains saves roughly $18,500 at the federal 37% bracket plus another $6,650 in California at the 13.3% top bracket (with no economic change to the portfolio). That is one of the largest legal tax arbitrages still available in 2026.

Our crypto tax team sees this work as a near-default move for clients with significant unrealized crypto losses each December. Your investment advisor handles the trade timing; SVT handles the basis tracking, the cost-basis lot reporting, and making sure the loss flows through Form 8949 cleanly.

Pending Legislation: The Window May Close

Congress has noticed. The Build Back Better Act of 2021, the Lummis-Gillibrand Responsible Financial Innovation Act, and the Wyden Digital Asset Tax Reform discussion drafts all proposed extending Section 1091 to digital assets. None of those proposals have become law as of the 2026 filing season.

The proposed effective dates in earlier drafts were forward-looking (typically the year after enactment, never retroactive). If Congress does extend Section 1091 to crypto, expect at least one full tax year of advance notice before the change bites. The 2026 tax year is clean. The 2027 tax year is something to watch.

The practical move: harvest aggressively in 2026 while the rule is still favorable, and stay aware of legislative developments going into 2027. Our year-end tax moves guide walks through the timing.

Worked Example: Engineer Harvests $30K in Losses

Two parallel scenarios for a Mountain View software engineer with a $400K W-2, a Vanguard taxable brokerage account, and a Coinbase account.

Scenario A: Equity wash sale. The engineer sells VOO at a $30K loss on December 12. On December 19, they buy VOO back at roughly the same price because the market rallied. Section 1091 disallows the entire $30K loss for the 2026 tax year. The disallowed loss bumps the basis of the December 19 shares by $30K. The engineer cannot use the loss on the 2026 return. Tax cost: roughly $11,100 federal at 37% plus $3,990 California at 13.3%, totaling about $15,090 in deferred tax benefit.

Scenario B: Crypto loss harvest. Same engineer sells $30K of BTC at a $30K loss on December 12. On December 13, they rebuy the same amount of BTC at the same price. Section 1091 does not apply. The full $30K loss flows to Form 8949, offsets short-term gains dollar for dollar, and produces roughly $15,090 in actual tax savings on the 2026 return.

Same dollar amount of loss. Same investor. Different asset class. $15,090 swing in real tax owed.

What Goes Wrong When Investors DIY It

The most common wash-sale failure we catch at intake: a Bay Area engineer harvested $40K of losses in their Schwab taxable account in December, while their auto-invest at Vanguard kept buying the same target-date fund (which holds the same underlying ETF) inside their Roth IRA. Neither broker flagged it. The $40K loss was permanently extinguished, costing roughly $14,800 of federal tax at the 37% bracket. DIY tax software does not aggregate across brokers, across spouses, or across taxable/IRA accounts. That cross-account audit is exactly the work an engagement does each fall before the harvest goes live.

ETF Substitution: How Equity Investors Get Most of the Benefit

The wash sale rule applies to substantially identical securities. Different issuers tracking the same index are not substantially identical under current practitioner consensus. That opens a clean substitution strategy for broad-market equity positions:

Original Position	Acceptable Substitute (Same Window)	Why It Works
VOO (Vanguard S&P 500)	SPY (SPDR S&P 500) or IVV (iShares S&P 500)	Different issuers, different funds, same index
VTI (Vanguard Total Stock Market)	SCHB (Schwab Broad Market) or ITOT (iShares Core Total)	Different issuers, different funds, near-identical exposure
QQQ (Nasdaq 100)	VGT (Vanguard Tech) or VONG (Vanguard Russell 1000 Growth). QQQM use with caution: same sponsor, same index.	VGT and VONG are different sponsors and different indices. QQQM tracks the same Nasdaq 100 as QQQ from the same sponsor (Invesco); most practitioners treat that pair as substantially identical.
VXUS (Vanguard Total International)	IXUS (iShares Core MSCI Total International) or SCHF (Schwab International)	Different issuers, comparable but distinct indices

The QQQ to QQQM swap is the one grey zone in the table. They are different ticker symbols and technically different funds, but issued by the same sponsor (Invesco) tracking the exact same index. Most practitioners treat them as substantially identical out of caution. The conservative play is QQQ to VGT, accepting slightly different exposure for clear separation.

The substitution strategy gives equity investors roughly 95% of the wash sale benefit crypto holders get, with the friction of staying in the substitute for at least 31 days before swapping back. Beyond 31 days the rule does not apply and you can repurchase the original position freely.

What SVT Does and Does Not Do

To be clear on scope: SVT is a CPA and Enrolled Agent firm. We are not a broker-dealer and we do not pick stocks, time trades, or rebalance your portfolio. Your investment advisor handles the trade execution. What we cover:

• Wash sale tracking across all your accounts, including the cross-account combinations brokers will not flag
• Cost basis adjustments when wash sales trigger and basis flows to replacement shares
• Form 8949 reporting with correct disallowed loss codes
• Crypto basis tracking across exchanges and wallets, by lot, with FIFO / Specific ID elections
• Year-end planning sessions in October/November to identify harvest candidates before the December rush

For tech employees with concentrated equity from RSUs or ISOs, this work integrates with our broader tech-employee tax planning practice. The same year-end review surfaces wash sale risk, AMT exposure, ISO exercise opportunities, and QSBS holding-period decisions in a single sitting.

FAQ

Does the wash sale rule apply to my Roth IRA?

Yes, and worse than to your taxable account. If you sell substantially identical stock at a loss in your taxable account and buy it in your Roth (or any IRA) within the 61-day window, the loss is permanently disallowed. Basis cannot be added to IRA positions. Revenue Ruling 2008-5 is explicit on this.

Does the wash sale rule apply to crypto in 2026?

No. Section 1091 only covers "stock or securities" and the IRS treats cryptocurrency as property under Notice 2014-21. You can sell BTC, ETH, or any other digital asset at a loss and rebuy it immediately without triggering a wash sale. Congress has proposed extending the rule to crypto in several bills, but none have passed as of the 2026 tax year.

Can I sell VOO and buy SPY without a wash sale?

Yes, under current practitioner consensus. VOO and SPY track the same S&P 500 index but are issued by different sponsors (Vanguard and State Street) and are different securities. They have been treated as not substantially identical for decades. The IRS has never issued formal guidance closing this gap.

What if my spouse buys the stock I just sold at a loss?

It still triggers a wash sale. The rule applies to your spouse's purchases regardless of how you file (MFJ, MFS, or separate accounts). The IRS treats your spouse's purchases as your acquisitions for Section 1091, even if the accounts are titled separately. If you are harvesting losses, coordinate with your spouse's accounts and any auto-invest features.

How long do I have to wait before rebuying?

You need to wait 31 days after the sale date before rebuying substantially identical stock. The window is 30 calendar days, so day 31 is safe. You also need to make sure you did not buy substantially identical stock in the 30 days before the sale, which catches people who add to a position and then try to harvest losses on older lots.

Does my broker track wash sales for me?

Partially. Brokers flag wash sales on Form 1099-B (code W) only within the same account at the same brokerage. They do not aggregate across your accounts at different brokerages, across spouses, or across your taxable account and your IRA. The IRS expects you and your tax preparer to catch the cross-account violations.

Getting It Right

Wash sales are one of the most common reasons tax-loss harvesting strategies underperform. The math looks clean on a spreadsheet and falls apart when an automated IRA contribution or a spouse's account triggers the rule from the wrong direction.

If you are planning equity loss harvesting this year, the right time to set the strategy is October or November, not December 27. If you are sitting on unrealized crypto losses, 2026 may be the last clean year before Congress acts. Either way, SVT handles the basis tracking, the form reporting, and the cross-account audit so the loss you intended to harvest is the loss you actually get.

Schedule a complimentary consultation and we will walk through your account structure, identify wash sale exposure, and map a year-end plan that survives contact with the broker statements.