When portfolios get large and spread across multiple accounts, custodians, and reinvestment systems, tax loss harvesting becomes more complicated than most investors expect. One of the most common questions I hear is whether wash sales are quietly undoing the benefits of all that careful tax planning.
In most cases, the issue is not as dramatic as people fear. But there are a few situations where wash sales can create real problems if you are not paying attention.
What a Wash Sale Actually Is
A wash sale occurs when you sell an investment at a loss and then buy the same or a substantially identical investment within 30 days before or after the sale. When that happens, the IRS disallows the loss for tax purposes.
The simplest example is selling a stock at a loss and buying it back the next day. The government views that as never really exiting the position, so the loss is disallowed and your cost basis is adjusted instead.
Timing matters here. If you sell an investment at a loss and wait at least 31 days before repurchasing it, the loss is generally allowed.
Where Things Get Complicated: Substantially Identical Investments
The real gray area is what qualifies as substantially identical. This is where tax loss harvesting gets tricky, especially with ETFs and index funds.
If you sell an S&P 500 fund from one provider and immediately buy another S&P 500 fund from a different provider, you still hold essentially the same underlying investments. Some people argue that different fund companies make them different enough. Others see them as clearly identical. The IRS has not drawn a bright line here.
This uncertainty is why tax loss harvesting pairs exist. Investors try to sell one fund and buy another with similar exposure but different underlying holdings. Selling an S&P 500 fund and buying a broader market fund or a different index altogether is generally viewed as safer than swapping identical indexes from different providers.
The more similar the exposure, the more careful you need to be.
Why Brokers Do Not Always Catch the Problem
When all of your accounts are held at the same brokerage, many wash sales are automatically detected and reported. If you sell a position at a loss and repurchase it too quickly, the broker adjusts your basis and reports it correctly on your 1099.
The problem arises when accounts are spread across multiple custodians. If you sell an investment at one firm and buy it at another, no single broker sees the full picture. That wash sale does not get flagged automatically.
At that point, the responsibility falls entirely on you. Taxes are self reported, and undiscovered wash sales can create compliance issues if they are not handled correctly.
Dividend Reinvestment Is a Common Culprit
One of the most common ways people accidentally trigger wash sales is through automatic dividend reinvestment.
You may sell a fund at a loss, thinking you have exited the position, only to have a small dividend reinvest automatically days later. Even a small purchase can trigger a wash sale and disallow the loss.
This becomes especially problematic when you are actively rebalancing or harvesting losses across multiple accounts.
For investors doing regular tax planning, turning off automatic dividend reinvestment can make things much cleaner. Dividends can accumulate as cash and be reinvested intentionally later, often helping with rebalancing rather than complicating it.
Do Not Forget About IRAs
Another overlooked issue is the interaction between taxable accounts and IRAs.
If you sell an investment at a loss in a taxable account and then buy the same investment in an IRA within the wash sale window, the loss is permanently disallowed. It does not get deferred or added to basis. It is simply gone.
This catches many investors by surprise because losses cannot be claimed in retirement accounts. But the wash sale rules still apply across account types.
What to Do Going Forward
When portfolios become complex, tax loss harvesting needs to be coordinated across all accounts, not handled in isolation.
Be deliberate about what you sell and what you buy. Watch automatic reinvestments. Pay attention to all custodians and account types, including IRAs. And recognize that your broker cannot always protect you from wash sales when assets are spread across firms.
Ultimately, you are responsible for understanding where wash sale exposure exists and how it affects your tax reporting. With the right structure and oversight, wash sales are manageable. Without it, they quietly erode the benefits you were trying to create.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on wash sales and tax loss harvesting in complex portfolios, listen to the full podcast episode here.