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Replacement Securities

In short

Similar but not identical securities used after tax-loss harvesting to maintain exposure

After selling a stock at a loss for tax purposes, you can't buy it back for 31 days (wash sale rule). Instead, buy something similar — like selling SPY and buying IVV (both track the S&P 500) — so you stay invested while harvesting the loss.

Replacement securities maintain market exposure after tax-loss harvesting without triggering wash sale rules. Use ETFs tracking the same index but from different providers (e.g., VOO → SCHB), or similar sector ETFs. The IRS looks at 'substantially identical' securities.

Related concepts

  • Wash Sale Rule — If you sell a stock at a loss and buy it back within 30 days (before or after), the IRS disallows the loss. This prevents you from harvesting losses while staying invested. To avoid it, buy a similar but different stock.
  • Tax-Loss Harvesting — If you're up $10,000 on Apple but down $3,000 on another stock, you can sell the loser to offset $3,000 of your Apple gains. You only pay tax on $7,000 instead of $10,000. The IRS lets you use losses to cancel gains.
  • Cost Basis — If you buy 10 shares at $100 each, your cost basis is $1,000. When you sell for $1,500, you're taxed on the $500 gain, not the full $1,500. The cost basis is your starting point for tax calculations.