Why Smart Investors Still Trigger Wash Sales

The Wash Sale Rule Isn’t Complicated, but Living With It Is

On paper, the wash sale rule looks straightforward. If you sell a security at a loss and buy the same or a “substantially identical” security within 30 days before or after the sale, the IRS disallows the loss. Instead of getting a tax benefit, the loss is added to the cost basis of the new shares.

Most investors read that once, nod, and assume they’ll be careful.

Yet wash sales remain one of the most common reasons tax loss harvesting fails in practice—even among experienced, disciplined investors who understand the rule perfectly. The problem isn’t knowledge. It’s execution.

The wash sale rule doesn’t exist in a vacuum. It operates across time, across accounts, and across actions investors don’t always think of as “trades.”

How Wash Sales Actually Happen

The most common wash sales aren’t caused by reckless trading. They’re caused by perfectly reasonable behavior.

An investor sells shares of a long-held stock at a loss during a market pullback, intending to harvest the loss and reinvest later. A week later, they rebalance their portfolio and buy back into the same stock without connecting the dots. The loss is gone.

Another investor sells a stock at a loss in a taxable account, forgetting that the same stock is held in a spouse’s account or a separate brokerage. A dividend reinvestment quietly purchases a few shares within the 30-day window. The wash sale is triggered automatically.

In many cases, investors don’t even realize what happened until tax season—long after the opportunity to fix it has passed.

The Multi-Account Problem

Modern investors rarely operate out of a single account. It’s common to have multiple taxable brokerages, joint accounts, inherited accounts, and employer-sponsored plans. The wash sale rule applies across all of them.

That means selling a stock at a loss in one account and repurchasing it in another can invalidate the loss entirely. Brokerage platforms don’t coordinate with one another. They don’t warn you. They don’t stop you.

From the IRS’s perspective, it doesn’t matter that the purchases happened in different places. From the investor’s perspective, it’s an easy mistake to make.

Dividend Reinvestment: The Silent Wash Sale Trigger

Dividend reinvestment plans are one of the most overlooked wash sale risks.

An investor sells shares of a dividend-paying stock at a loss, feeling confident they’ve harvested the loss. Days later, a dividend is automatically reinvested into the same stock. The amount might be small, but it doesn’t matter. Even a single share can trigger a wash sale and partially or fully disallow the loss.

Because dividend reinvestments feel passive, investors often don’t connect them to wash sale violations. But the IRS does.

Timing Is Harder Than It Looks

The wash sale window is 61 days long—30 days before the sale, the day of the sale, and 30 days after. That’s a wide net.

Avoiding that window requires tracking not just future purchases, but past ones as well. If you bought shares 10 days before selling at a loss, the wash sale rule still applies. For investors who rebalance regularly, add to positions opportunistically, or dollar-cost average into stocks, this becomes extremely difficult to manage mentally.

Why Manual Tax Loss Harvesting Breaks Down

In theory, a careful investor could manage all of this manually. In practice, very few do. Tracking tax lots, monitoring 61-day windows, coordinating across accounts, pausing dividend reinvestments, and ensuring replacement securities aren’t “substantially identical” requires constant attention. One missed detail is enough to erase the benefit of the entire strategy.

The irony is that many investors who attempt tax loss harvesting manually end up worse off than those who don’t attempt it at all. They take the complexity risk without capturing the reward.

The Emotional Cost of Getting It Wrong

There’s also a psychological cost. Investors who trigger wash sales often lose confidence in the strategy entirely. They conclude that tax loss harvesting is “too complicated” or “not worth the hassle.”

In reality, the problem isn’t the strategy. It’s the lack of systems. Tax loss harvesting isn’t a one-time decision. It’s an ongoing process that needs structure, memory, and consistency—things humans aren’t great at maintaining indefinitely.