Harvesting a loss is one of the few tax moves an advisor can make in almost any market: sell a position below its cost, use the loss against gains, and stay invested by buying something similar. In a single brokerage account the rules are manageable. In a family with a dozen accounts across entities and custodians, the wash-sale rule is where good intentions go wrong.
The rule in one paragraph
Under Section 1091 of the Internal Revenue Code, a loss on the sale of a security is disallowed if the taxpayer acquires substantially identical securities within 30 days before or after the sale, a window of 61 days in all. In an ordinary wash sale the loss is deferred rather than lost: it is added to the cost basis of the replacement shares and recognized when those are sold.
Where families get caught
The rule looks at the taxpayer, not the account. That is what makes multi-entity families difficult.
- IRAs. Sell at a loss in a taxable account and buy the same security in your IRA within the window, and the IRS has ruled the loss disallowed with no basis increase in the IRA (Revenue Ruling 2008-5). That loss is gone for good.
- Spouses and controlled companies. IRS guidance treats a purchase by your spouse, or by a corporation you control, as a wash sale too, even when the accounts are held separately.
- Grantor trusts. A revocable trust, or another trust taxed to its grantor, is generally disregarded for income tax. Its trades count as the grantor’s.
- Automatic purchases. Dividend reinvestment, a model rebalancing another account or a scheduled contribution can each trigger a wash sale nobody intended.
Separate taxpayers, such as a non-grantor trust, are generally tested on their own trades. That separation can be useful, but it is not a loophole: sales between related parties carry their own loss limits, and the answer depends on facts worth confirming with the family’s tax advisor.
A harvesting checklist for complex households
- Map every account to its taxpayer before the first trade: individual, spouse, grantor trust, non-grantor trust, entity.
- Pause dividend reinvestment and automatic purchases in related accounts for the window.
- Choose replacements that are similar in exposure but not substantially identical. The IRS has not drawn a bright line, so many advisors use funds that track a different index.
- Check the 30 days before the sale as well as the 30 after.
- Record the lots sold, the replacements and the dates, so the next harvest does not collide with this one.
The real cost is coordination
None of these rules is obscure. The hard part is seeing every account in the household at once, on the day of the trade, when the accounts sit at different custodians and some are managed by someone else. That is a data problem before it is a tax problem, and one reason Caldris looks across every account a family holds before it suggests a harvest.
This article is general information, not tax, legal or investment advice.