Wash sale rule and substantially identical securities

The wash sale rule applies when you buy a "substantially identical" security within 30 days before or after selling at a loss. The problem is that the IRS has never published a complete definition of what "substantially identical" means, leaving investors to navigate clear cases, grey areas, and a fair amount of guesswork.

Disclaimer: This article is for educational purposes only and does not constitute tax or financial advice. Consult a qualified tax professional for guidance specific to your situation.

What the IRS actually says

The wash sale rule lives in IRC Section 1091, which uses the phrase "substantially identical" without defining it exhaustively. The most relevant guidance comes from a handful of older IRS rulings and publications.

Revenue Ruling 85-87 addressed bonds, concluding that two bonds from the same issuer with similar terms could be substantially identical. IRS Publication 550 offers a brief discussion focused mainly on stocks and bonds, noting that shares of one corporation are generally not substantially identical to shares of another corporation.

Beyond that, the IRS has deliberately declined to draw bright lines, particularly around modern investment products like ETFs and index funds that did not exist when the original guidance was written. This means investors and tax professionals must apply the general principle to specific situations, often without a definitive answer.

For a complete overview of the wash sale rule itself, see our guide to the wash sale rule explained.

Clear cases: what IS substantially identical

Some situations are straightforward. These will almost certainly trigger a wash sale if the transaction falls within the 61-day window.

Same stock

This is the most obvious case. Selling 100 shares of AAPL at a loss and buying 100 shares of AAPL within 30 days is a wash sale. Same company, same security, no ambiguity.

Options on the same stock

Selling stock at a loss and then buying call options on the same stock can trigger a wash sale. The IRS views call options as essentially equivalent to owning the stock because they give you the right to acquire it. For example, selling AAPL shares at a loss and purchasing AAPL call options within the window would likely be treated as a wash sale.

Put options are less clear. Selling stock at a loss and buying put options on the same stock is generally not considered a wash sale because puts give you the right to sell, not acquire, the stock.

Different share classes of the same company

When a company has multiple share classes, the IRS generally treats them as substantially identical because they represent ownership in the same entity. Selling Alphabet Class A shares (GOOGL) at a loss and buying Class C shares (GOOG) within 30 days would likely trigger a wash sale. The same logic applies to Berkshire Hathaway's Class A (BRK.A) and Class B (BRK.B) shares.

Convertible securities

Convertible bonds or preferred shares that can be converted into common stock of the same company may be considered substantially identical to that common stock, particularly if the conversion terms make them economically equivalent.

Clear cases: what is NOT substantially identical

Different companies in the same sector

Selling shares of Microsoft at a loss and buying shares of Apple within 30 days is not a wash sale. They are different companies with different financials, products, and risk profiles. This remains true even though both are large-cap technology stocks. The IRS looks at the identity of the security, not the sector.

Bonds from different issuers

A corporate bond from Company A and a corporate bond from Company B are different securities with different credit risk and terms. Selling one at a loss and buying the other does not trigger a wash sale.

The grey areas

This is where things get complicated and where most investor questions arise. The IRS has not issued definitive guidance on the situations below, so the analysis relies on professional interpretation and the general principle behind "substantially identical."

S&P 500 ETFs from different providers

VOO (Vanguard), SPY (SPDR), and IVV (iShares) all track the S&P 500 index. Their holdings overlap by more than 99%. They deliver nearly identical returns, charge similar fees, and hold the same 500 stocks in nearly the same proportions.

Most tax professionals consider these potentially substantially identical because the economic substance is the same. The only differences are the fund structure, the exact expense ratio, and minor tracking differences. If you are looking for a conservative approach, avoid swapping between ETFs that track the same index within the wash sale window.

That said, the IRS has never explicitly ruled on this. Some practitioners take the position that because they are technically different securities issued by different companies, they are not substantially identical. This is a minority view, and relying on it carries risk.

Mutual fund share classes

Investor shares, Admiral shares, Class A, Class C. Different share classes of the same mutual fund hold the exact same portfolio. The only difference is the fee structure and minimum investment. These are almost certainly substantially identical because the underlying holdings are identical.

For example, if a fund offers both Class A and Class C shares, selling one class at a loss and buying the other within 30 days would very likely be treated as a wash sale. The same logic applied historically to Vanguard's Investor and Admiral share classes before they were consolidated.

ETF vs mutual fund version of the same index

Some fund families offer both an ETF and a traditional mutual fund tracking the same index. Vanguard Total Stock Market ETF (VTI) and Vanguard Total Stock Market Index Fund (VTSAX) hold the same portfolio in different wrappers. Most tax professionals treat these as substantially identical because the underlying holdings, index, and fund manager are the same.

Similar but not identical indexes

This is the most commonly used tax-loss harvesting swap, and it is generally considered acceptable by most tax professionals. The classic example: selling an S&P 500 ETF at a loss and buying a total stock market ETF as a replacement.

The S&P 500 tracks 500 large-cap US stocks. A total stock market fund tracks roughly 3,500 to 4,000 US stocks across all market caps. While there is significant overlap in the large-cap portion, the indexes are different, the weightings are different, and the total market fund includes mid-cap and small-cap stocks that the S&P 500 does not.

Most practitioners consider this swap safe because the funds track fundamentally different indexes. However, it is worth noting that the IRS has never confirmed this interpretation. The more overlap between two funds, the higher the risk. Swapping between very similar indexes (for example, the S&P 500 and the S&P 500 Equal Weight) carries more uncertainty than swapping between clearly different ones (S&P 500 and a total international fund).

To assess how much overlap exists between two specific ETFs, you can use our ETF overlap tool to compare holdings side by side.

Leveraged and inverse ETFs

A 2x leveraged S&P 500 ETF and a standard S&P 500 ETF deliver very different return profiles. The leveraged fund resets daily and compounds differently over time, resulting in returns that can diverge significantly from the underlying index over longer holding periods. Most practitioners consider these not substantially identical, despite tracking the same index, because the economic exposure and risk characteristics are fundamentally different.

The same logic applies to inverse ETFs, which move in the opposite direction of the index.

How to approach grey areas in practice

There is no single right answer for every grey area, but here are two general approaches:

Conservative approach. Only swap into securities that track a clearly different index or asset class. Sell your S&P 500 ETF and buy a total international ETF, or sell a large-cap fund and buy a small-cap fund. The greater the difference in underlying holdings, the safer the swap. This approach minimises risk but may result in a portfolio that drifts from your target allocation during the 31-day waiting period.

Moderate approach. Swap between funds that track different indexes with meaningful differences, such as S&P 500 to total stock market. Accept that some overlap exists but rely on the fact that the indexes, weightings, and compositions are different. This is the approach most tax-loss harvesting strategies use in practice.

Whichever approach you take, document your reasoning. If the IRS questions a swap, having a clear record of why you considered the replacement security to be different from the one you sold strengthens your position. For more on harvesting strategies and swap ideas, see our tax-loss harvesting guide for US investors.

How TrackMyShares handles substantially identical securities

TrackMyShares detects wash sales by matching the exact symbol. If you sell VOO at a loss and buy VOO within the 61-day window, the system flags it. This detection works across multiple portfolios when you use the consolidated portfolio feature.

The system does not automatically flag cross-security situations. If you sell VOO and buy SPY within the window, TrackMyShares will not flag this as a potential wash sale because they are different symbols. The same applies to other grey-area swaps like selling an ETF and buying the mutual fund version of the same index.

For these situations, you will need to apply your own judgement (or consult a tax professional) to determine whether the replacement security is substantially identical to the one you sold. The grey areas discussed in this article can help you make that assessment.

Sign up for TrackMyShares to track your portfolio, detect same-symbol wash sales automatically, and make more informed decisions when harvesting tax losses.