Wash Sale Substantially Identical Securities: Examples

Substantially identical securities are the replacement buys that turn a losing sale into a wash sale. The same stock counts, wherever you buy it. So does an option to acquire it. Another company’s stock ordinarily doesn’t count, even a close competitor’s. Two funds from different sponsors that track the same index sit in a gray area the IRS has never ruled on, and that pair is where most of the disagreement lives.

No definition, just facts and circumstances

Neither Congress nor the IRS has defined the phrase. IRS Publication 550 tells you to consider all the facts and circumstances. That’s an honest answer.

It’s also not much help when you’re looking at a red position in December and wondering whether the replacement you have in mind will cost you the loss, because the only thing the test promises is that someone will weigh the details of your case later, after the trade is long done.

What Pub 550 does offer is a pair of ordinary presumptions. Stock or securities of one corporation are ordinarily treated as different from those of another corporation, and a corporation’s bonds or preferred stock are ordinarily treated as different from its own common stock. Both presumptions have exceptions, convertibles among them. The exceptions are where people get caught.

The test only matters inside the window. That runs from 30 days before the losing sale to 30 days after it, 61 days with the sale day included. Buy anything you like outside it. The wash sale window calculator marks both ends for any sale date.

Example pairs, as generally treated

The pairs below are hypothetical and the treatment column is general guidance only. Read each row as a starting point. Your own facts can move any of them. For a real trade, read IRS Publication 550 and ask a tax professional.

You sell at a loss	You buy inside the window	Generally treated as
Common stock of a company, in your main brokerage account	The same common stock, in a second account at another broker	Substantially identical. A wash sale your first broker won’t see.
Common stock of a company	The same common stock, bought in your IRA or Roth IRA	A wash sale (Revenue Ruling 2008-5). The loss isn’t added to IRA basis, so it can be lost.
Common stock of a company	The same stock, bought by your spouse or a corporation you control	A wash sale.
Common stock of a company	Call options on that same company	A wash sale. An option to acquire the stock counts.
Common stock of a company	Common stock of a different company in the same industry	Ordinarily not substantially identical. A reorganization can change that.
Common stock of a company	That company’s plain bonds or plain preferred	Ordinarily not substantially identical.
Common stock of a company	That company’s convertible preferred	Depends on relative values, price changes and other circumstances. Can be substantially identical.
A fund tracking an index	A fund from a different sponsor tracking the same index	Gray area. No IRS ruling. Get advice first.
A fund tracking one index	A fund tracking a different index	Generally viewed as a different security. Heavy overlap weakens that view.

Same stock, different place

The easiest wash sales to miss involve the exact same shares, bought somewhere you weren’t watching. The rule looks at you as a taxpayer across all your accounts. A buy in a second brokerage account counts. So does a buy in your IRA or Roth IRA, which the IRS confirmed in Revenue Ruling 2008-5. Purchases by your spouse count, and so do purchases by a corporation you control.

The IRA case is the harsh one.

Normally a disallowed loss raises the cost basis of the replacement shares, so it comes back when you sell them. Inside an IRA it doesn’t. The loss isn’t added to IRA basis, and it can simply be gone.

Your broker won’t catch most of this. Brokers report wash sales on Form 1099-B, in box 1g, only for identical securities (the same CUSIP) bought and sold within the same account, which means a buy in your other account, in your spouse’s account or in your IRA never reaches that box, and neither does a swap into something similar with a different CUSIP.

Call options on the stock you sold

The rule reaches past shares. Acquiring a contract or option to acquire substantially identical stock inside the window is a wash sale too. Calls on the company you just sold are exactly that. Buying them two weeks after the losing sale leaves you where you’d be if you had bought the shares back.

The window works the same way for calls as it does for shares, so a call bought in the 30 days before the losing sale counts just as much as one bought after it, which catches anyone who opened the option position first and only then sold the stock.

It’s the obvious workaround, and it’s already covered.

Another company, or another class of security

Selling one company and buying a competitor is the standard way to stay in an industry while booking the loss. Two companies in one industry can trade in close step. Their charts may look alike. They’re still two corporations, and the ordinary presumption says their stocks aren’t substantially identical. Pub 550 does allow that they may be in some cases, with a reorganization as the example. If either company is in the middle of one, treat the swap as a question for a tax professional.

Switching to the same company’s debt or preferred is different. Plain bonds and plain preferred ordinarily count as different from the common.

Convertibles are the exception.

A bond or preferred share that converts into the common can be substantially identical to it, depending on the relative values, the price changes and other circumstances. Read those factors together and a fair working rule follows, though it’s a reading and no more: the more closely the convertible’s price follows the common, the harder it gets to argue the two are different holdings, and the less a swap into it looks like a real change of position.

Two funds, one index

Here is the gray area. Same-index funds run by two different sponsors have never been the subject of an IRS ruling, and the facts-and-circumstances test doesn’t settle them.

The argument for treating them as different goes like this. They’re separate funds from separate sponsors, each with its own fees and its own way of matching the index, and the normal presumption for two different issuers points toward different securities. The argument the other way is economic. Both funds hold close to the same basket. Their prices move nearly together. After the swap you own, in substance, what you sold.

Both arguments hold up. Neither has an IRS ruling behind it.

If the loss is large enough to matter to you, clear this swap with a tax professional before you place it, and keep a note of why you made it.

A fund on a different index

A different index makes a cleaner swap. Say you sell a fund following a large-company index and buy one following a broader total-market index. The holdings overlap, yet the index rules differ, the weights differ and the returns differ, which is why the pair is generally viewed as two different securities.

That view weakens as overlap grows. Two indexes holding almost the same stocks in almost the same weights start to look like the same-index case. Where a pair crosses from different to too similar is a judgment call, and no published line marks it, so keep your reasoning for any swap you make in case you ever need to explain it.

Checking your own trades

Start with the 1099-B. Box 1g shows the wash sale losses your broker caught. Those are same-CUSIP repurchases inside that one account, and that’s all.

Everything else is yours to find. That means buys in your other accounts and in any IRA or Roth IRA, buys by your spouse or by a corporation you control, call options on what you sold, and swaps into anything that could be substantially identical. List every losing sale for the year, with the CUSIP of what you sold. Matching CUSIPs are the easy part. Run each sale date through the calculator to get its window, then check each window against purchases in every account you and your spouse hold. Doing this before each replacement order is far easier than rebuilding it from statements months later.

Which lot you sell also decides the size of the loss in the first place, so it’s worth deciding before the order goes in, as covered in choosing tax lots before selling.

Publication 550 holds the IRS presumptions in full. For your own pair of securities, especially anything in the gray rows above, ask a tax professional who can see all your accounts.