Most tax-loss harvesting happens in the last two weeks of December, when everyone remembers at once. September is a better time to do it, and the reason is a rule most investors only half know. A wash sale doesn’t require you to rebuy the same fund yourself. An automatic purchase in your Roth IRA can do it for you, and when that happens, the IRS doesn’t just postpone your loss. It deletes it.
Tax-loss harvesting is simple until the 61-day window
The idea is easy. You sell an investment that’s worth less than you paid, book the loss, and use it to cancel out capital gains. If your losses are bigger than your gains, the IRS lets you deduct up to $3,000 of the excess against ordinary income ($1,500 if you’re married filing separately), and anything left over carries forward to later years. Then you buy something similar so you’re still invested.
The catch is the wash sale rule. According to the IRS instructions for Schedule D, a wash sale happens when you sell stock or securities at a loss and, within 30 days before or after the sale, you buy substantially identical stock or securities, get them in a taxable trade, enter a contract or option to buy them, or acquire them for your IRA or Roth IRA. That’s a 61-day window centered on the sale date, and every purchase in it counts, including ones you set up months ago and forgot about.
The IRA purchase that erases your loss
In a regular taxable account, a wash sale is mostly a timing problem. The disallowed loss gets added to the cost basis of the replacement shares, so you get it back eventually when you sell those.
An IRA doesn’t work that way. In Revenue Ruling 2008-5, the IRS looked at an investor who sold 100 shares at a loss on December 20 and had an IRA buy 100 shares of the same stock the next day. The ruling said the loss is disallowed, and that the basis of the IRA is not increased. Since there’s no basis adjustment inside the IRA to recover it later, the loss is simply gone.
This is the point the standard advice tends to skip. The usual warning is about rebuying the fund in your brokerage account. The purchase more likely to catch you is the automatic monthly contribution to your Roth IRA that buys the same S&P 500 fund you just sold at a loss in your taxable account. You didn’t make a trade. Your autopay did.
The worked example: what the leak costs
Say you bought 40 shares of an S&P 500 index fund at $500 a share, $20,000 in total, and it’s now trading at $412.50. The position is worth $16,500, and selling it books a $3,500 loss. If you have no other gains this year, $3,000 of that offsets ordinary income. In the 22% bracket, that saves you $660 in tax this year, and the remaining $500 carries forward.
Now suppose your Roth IRA has a $500 monthly auto-investment into the same fund, and it fires two weeks after your sale. At $412.50 a share, that buys about 1.212 shares. The wash sale rule matches those shares against the ones you sold, so the loss on 1.212 shares, about $106.06, is disallowed. Your usable loss drops to $3,393.94. In this version, the leak is small: roughly $23 of tax at 22%.
The expensive version is the one people do on purpose. If you sell the fund in your taxable account and then buy the whole position back in your IRA to “keep it in the family”, the entire $3,500 loss disappears. At 22%, that’s $770 of tax savings thrown away, and no basis adjustment brings it back.
Dividend reinvestment is the other quiet trigger
Automatic dividend reinvestment works the same way. If you sell some lots of a fund at a loss but keep other shares of it, and those shares pay a dividend that’s automatically reinvested within 30 days of your sale, the reinvested shares are a purchase. Part of your loss becomes a wash sale.
The dates matter here. Plenty of index ETFs pay dividends quarterly. Vanguard’s S&P 500 ETF, for example, went ex-dividend on March 27, June 30, September 29, and December 22 last year. If you wait until the week before Christmas to harvest, you’re selling right inside the window around a December dividend. Harvesting in September or October, and turning off reinvestment on that fund for the weeks around your sale, gives you room to clear the window before the year-end rush.
When harvesting losses is a waste
Some investors shouldn’t bother harvesting losses at all. For 2026, the IRS’s inflation adjustments set the top of the 0% long-term capital gains rate at $49,450 of taxable income for single filers and $98,900 for married couples filing jointly. If you’re under those levels, your long-term gains may already be taxed at 0%, and using a loss to wipe out gains that would have cost you nothing is a waste of that loss.
In that situation, the reverse move can make more sense: sell winners to realize gains at 0%, then rebuy them right away to reset your cost basis higher. The wash sale rule only applies to losses, so rebuying immediately after a gain is fine. Losses are still useful for offsetting up to $3,000 of ordinary income, but you’d want them aimed there rather than at 0% gains. For more on how the two IRA types are taxed, see the post on Traditional vs. Roth IRAs.
A September checklist in plain terms
Start by listing every account that could buy the fund you plan to sell: your taxable brokerage account, and your IRA and Roth IRA, even if they’re at a different company. Look at each one for automatic investments and dividend reinvestment on that fund. Pause them, or redirect the IRA contributions to a different fund, for at least 31 days after your sale.
Then pick a replacement that keeps you invested without being substantially identical. The IRS doesn’t offer a bright-line test for when two funds are substantially identical, which is why many investors swap between funds that track different indexes, such as an S&P 500 fund and a total market fund, rather than between two S&P 500 funds from different companies. After the 31 days pass, you can switch back if you want.
Finally, keep the trade confirmations from every account. If a wash sale does slip through, the Schedule D instructions say to report it on Form 8949 with code W and enter the disallowed amount as an adjustment, and your records are what let you get that number right.
Tax-loss harvesting is still one of the few ways to get something useful out of a bad year in the market. Done in September, with the automatic purchases switched off, it keeps the loss you paid for. Wash sale treatment depends on your full set of accounts and the specific funds involved, so if your situation is complicated, a tax professional can confirm the details before you sell.
Sources: IRS, 2025 Instructions for Schedule D; IRS, Revenue Ruling 2008-5; IRS, Revenue Procedure 2025-32 (2026 inflation adjustments)
