The wash sale rule applies to your Roth IRA, and it bites harder there than anywhere else. If you sell a security at a loss in a taxable account and buy the same security in your Roth IRA within the 61-day window around that sale, the loss is disallowed and the tax benefit is gone for good. There is no basis adjustment inside the Roth to recover it later, which is the fix that softens wash sales in ordinary brokerage accounts.
Why the Loss Is Permanent Inside a Roth
In a normal taxable account, a wash sale defers the loss rather than destroying it. The IRS disallows the deduction and adds the disallowed amount to the cost basis of your replacement shares, so you recover the benefit when you eventually sell those shares in a non-wash transaction.1Internal Revenue Service. Publication 550 – Investment Income and Expenses
Roth IRAs break that mechanism. Publication 550 carves out a specific exception: when the replacement shares are bought inside an IRA or Roth IRA, the disallowed loss is not added to their basis.1Internal Revenue Service. Publication 550 – Investment Income and Expenses Revenue Ruling 2008-5 confirms it directly, holding that the taxpayer’s basis in the IRA or Roth IRA is not increased under Section 1091(d).2IRS. Revenue Ruling 2008-5
A higher basis inside a Roth would not help you anyway. Qualified withdrawals from a Roth come out free of federal income tax once you have met the five-year aging rule and reached 59½,3Internal Revenue Service. Roth IRAs so gains inside the account are never taxed and losses inside it never deducted. The disallowed loss in your taxable account has nowhere to land. It is a forfeiture, not a deferral.
Revenue Ruling 2008-5 applies the same way to traditional IRAs. A sale-and-repurchase across either type of retirement account produces the same permanent disallowance.2IRS. Revenue Ruling 2008-5
The Cross-Account Scenario That Triggers It
The classic setup: you sell a stock at a loss in your taxable brokerage account, and within 30 days before or after that sale you buy the same stock (or something substantially identical) in your Roth IRA. Publication 550 explicitly lists acquiring substantially identical stock for your IRA or Roth IRA as a wash sale trigger.1Internal Revenue Service. Publication 550 – Investment Income and Expenses
The 61-day window is the 30 days before the sale, the day of the sale, and the 30 days after, under Internal Revenue Code Section 1091.4Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities Direction does not matter. A Roth IRA purchase that happens 20 days before you sell the same security at a loss in your taxable account triggers the rule just as clearly as a purchase 20 days after.
The Dividend Reinvestment Trap
Not every cross-account wash sale is deliberate. If you hold the same security in your taxable account and your Roth IRA, and the Roth has automatic dividend reinvestment turned on, each reinvested dividend counts as a purchase of substantially identical stock. Sell that security at a loss in your taxable account inside the 61-day window and the small automatic reinvestment inside the Roth triggers a wash sale.
The dollar amounts on each side are wildly mismatched. A $15 dividend reinvestment can disallow a loss of thousands. Nothing in the rule scales the disallowance to the size of the replacement purchase.
What Counts as Substantially Identical
The rule only fires when the replacement is “substantially identical” to what you sold. The IRS does not define the phrase precisely and says you must consider all facts and circumstances. Publication 550 offers a couple of guideposts: stocks of one corporation are not ordinarily substantially identical to those of another, and a company’s bonds or preferred stock are not ordinarily treated as substantially identical to its common stock.1Internal Revenue Service. Publication 550 – Investment Income and Expenses
Index funds and ETFs are the gray area. Two S&P 500 funds from different sponsors hold nearly the same portfolio, and the IRS has not issued definitive guidance on whether swapping one for the other creates a wash sale. The conservative move when harvesting a loss is to switch to a fund tracking a genuinely different index, such as moving from an S&P 500 fund to a total stock market fund or a large-cap value fund.
Selling an individual stock and buying a broad ETF that happens to include that stock is generally not a wash sale, because the ETF is a diversified basket rather than a substitute for any single holding.
How to Keep Your Roth Out of a Wash Sale
The safest rule is a full 31-day gap. If you sell a security at a loss in a taxable account, do not buy it, or anything substantially identical, in any account, including your Roth IRA, for at least 31 days on either side of the sale.
- Buy something similar but not identical. A different ETF that tracks a different index gives you comparable market exposure without the substantially-identical problem.
- Turn off automatic dividend reinvestment in your Roth IRA for any position you also hold in a taxable account where you might harvest losses.
- Keep different holdings in each account. If your taxable account and your Roth do not overlap, cross-account wash sales cannot happen.
Your brokerage tracks wash sales within its own platform, but it does not see purchases at other firms. If your taxable account and your Roth IRA are held at different brokerages, no one is watching the cross-account window for you.
How to Report It If It Happens
A wash sale is reported on Form 8949. Enter code “W” in column (f) and report the disallowed loss as a positive number in column (g), which cancels the loss on that line.5Internal Revenue Service. Instructions for Form 8949 The totals carry to Schedule D.
Wash sales your broker identifies within its platform will show up on Form 1099-B with the disallowed amount in box 1g. A cross-account wash sale caused by a Roth IRA purchase at a different firm will not appear there. You have to catch it and make the adjustment yourself. For a wash sale caused by a Roth IRA purchase, the practical outcome on the return is short: the loss line goes to zero and nothing takes its place.