The wash-sale rule in IRC §1091 hinges on three words: substantially identical. Yet the IRS has never issued a comprehensive rule defining that phrase. Guidance sits scattered across a handful of revenue rulings and court decisions, leaving investors and their advisers to reason from analogy on many common scenarios.
This matters practically. The difference between a clean replacement and a substantially identical repurchase is the difference between a usable harvested loss and a disallowed one. For the foundational mechanics of the wash-sale rule before diving into the substantially-identical question, see the wash-sale rule, demystified.
What does "substantially identical" mean under §1091?
What is the IRS definition of "substantially identical" as it applies to the wash-sale rule under IRC §1091?
The IRS has never published a comprehensive bright-line test — "substantially identical" is a facts-and-circumstances standard, with guidance scattered across revenue rulings and court decisions rather than a single authoritative definition.
The statute uses the phrase but does not define it. The IRS has addressed specific fact patterns — corporate bonds with different maturities, Treasury obligations — but for equities the picture is considerably thinner. Revenue Ruling 58-211 held that bonds of the same obligor but with different maturities were not substantially identical, a data point practitioners frequently cite when evaluating bond swap strategies. Equity swaps require a different analysis.
The practical result: practitioners generally apply a conservative read of the phrase, treating securities with near-identical economic exposure as potentially covered, even when the formal legal question remains open.
Which securities are clearly substantially identical?
Which scenarios are unambiguously treated as "substantially identical" securities under the wash-sale rule?
Shares of the same company with the same CUSIP are clearly substantially identical — as are options to acquire those same shares, rights, and warrants on the same underlying security.
The clearest cases:
- Same stock, same CUSIP. Selling a company's common shares and buying back those same shares inside the window is textbook wash-sale territory.
- Options to buy the same stock. Selling the stock at a loss and buying a call option on the same stock inside the window may trigger wash-sale treatment, depending on the option's strike and term.
- Stock rights and warrants. Rights offerings and warrants convertible into the same underlying stock are generally treated as substantially identical to that stock.
Different share classes of the same company — Class A versus Class B — occupy a genuinely gray area. They represent different economic rights, but the underlying enterprise is the same. Many practitioners treat closely related share classes (especially dual-class shares with identical economic terms but different voting rights) as substantially identical. Rev. Rul. 58-211 does not resolve this question directly for equity share classes.
The gray zone: ETFs that track the same index
Are two ETFs that track the same index considered substantially identical for §1091 wash-sale purposes?
The IRS has not issued a ruling on this specific scenario, but many tax practitioners treat same-index ETFs as a high wash-sale risk and recommend replacing with a fund tracking a meaningfully different — though correlated — index instead.
The practical concern: selling an S&P 500 ETF from one fund family and immediately buying an S&P 500 ETF from another involves two funds that are economically near-identical, built around the same companies with the same weighting methodology. The IRS could plausibly apply the substantially-identical label. Replacing with a fund tracking the CRSP US Total Market Index or the Russell 1000 — broader than the S&P 500 and with different composition — is the approach that many practitioners treat as meaningfully distinct.
The gray-zone test practitioners most frequently apply is whether the substitute's underlying index differs materially in construction: different universe (e.g., top 500 vs. top 1000 vs. total market), different weighting methodology, or different sector composition thresholds. The wider the divergence, the lower the substantially-identical risk.
What is probably not substantially identical
Are preferred shares and common shares of the same company substantially identical, and what other pairs are generally treated as distinct under §1091?
Preferred shares and common shares of the same issuer are generally treated as not substantially identical because they represent materially different economic rights — but no IRS ruling definitively closes this question for all fact patterns.
Pairs commonly treated as distinct under current authority and practitioner consensus:
- Common stock vs. preferred stock of the same issuer. Different dividend priority, liquidation preference, and conversion terms distinguish them materially.
- Two different companies, even in the same sector. Selling one automaker's shares and buying a competitor's shares does not raise wash-sale concerns under §1091.
- Stock vs. bonds of the same issuer. Equities and debt instruments of the same company represent fundamentally different instruments.
- Equity ETF vs. an equity futures contract on the same index. These are different instruments despite similar economic exposure. Most practitioners treat these as not substantially identical.
For a broader map of the code sections that underpin these distinctions, the IRS code TLH cheat sheet covers the key provisions in plain English.
The IRA trap: how §1091 extends beyond taxable accounts
Can a purchase inside an IRA trigger a wash sale that disallows a loss in a taxable brokerage account?
Yes. Revenue Ruling 2008-5 holds that buying a substantially identical security in an IRA — traditional or Roth — within the 61-day wash-sale window after a taxable-account loss sale disallows that loss; and unlike taxable-account wash sales, the disallowed amount does not carry over to the IRA's cost basis.
This is one of the most consequential extensions of the wash-sale rule. In a taxable account, a disallowed loss is added to the replacement shares' cost basis, deferring rather than destroying the potential tax benefit. When the triggering purchase is inside an IRA, that basis-carryover mechanism does not apply — the disallowed loss may be permanently unavailable.
Investors who hold similar positions across taxable and retirement accounts benefit from coordinating harvesting decisions across both. Automatic dividend reinvestment inside an IRA on a stock that was just sold at a loss in a taxable account is a common inadvertent trigger of this scenario. For the foundational concepts behind TLH and account structure, TLH 101 is a useful starting point.
How HarvestEngine handles the substantially-identical question
How does HarvestEngine's replacement-candidate logic apply the substantially-identical analysis when selecting harvest swaps?
HarvestEngine's candidate selection flags same-index ETFs as elevated wash-sale risk and filters the replacement pool to securities with meaningfully different underlying benchmarks or compositions, applying the conservative practitioner standard.
The system extends wash-sale awareness across household accounts — a purchase in a spouse's account within the 61-day window applies the same exclusion logic, consistent with Rev. Rul. 2008-5's reach beyond single-account analysis. IRA holdings are treated as part of the household pool for purposes of the substantially-identical check.
No automated system resolves every edge case that a fact-specific ruling might address — where the analytic question is genuinely open, the conservative label applies. Investors with complex situations involving preferred shares, dual-class structures, or cross-instrument hedges may benefit from professional tax advice on their specific replacement choices.