How the Wash Sale Rule Works

IRC Section 1091 prevents you from claiming a loss on the sale of a security if you purchase a “substantially identical” security within 30 days before or after the sale date. That creates a 61-day window where you need to stay away from the same (or essentially the same) investment.

The rule exists to stop investors from selling a stock purely to book a tax loss and then immediately buying it back. The IRS wants the loss to be real — meaning you’ve actually changed your economic position, not just created a paper transaction.

If you trigger a wash sale, the disallowed loss gets added to the cost basis of the replacement shares. You’ll eventually get the benefit when you sell those replacement shares, so the loss is deferred, not destroyed. Unless you made the repurchase in an IRA — then the loss is gone for good.

The Miami Advantage: No State Layer

Investors in New York City face combined capital gains rates that can exceed 50% on short-term gains. In California, the top rate is 13.3% on all gains regardless of holding period. Miami investors? Federal rates only.

That means a wash sale violation in Miami costs less than the same violation in those states. But “less” is still meaningful:

• Short-term capital gains: taxed at your federal ordinary income rate, up to 37%, plus the 3.8% Net Investment Income Tax. A $10,000 disallowed short-term loss costs up to $4,080.
• Long-term capital gains: taxed at 0%, 15%, or 20% depending on income, plus the 3.8% NIIT. A $10,000 disallowed long-term loss costs up to $2,380.

Over a portfolio with $50,000 or $100,000 in potential losses during a down market, those numbers add up fast — even without a state tax multiplier.

Tax-Loss Harvesting for Miami Investors

No state income tax doesn’t mean you should ignore tax-loss harvesting. The federal savings alone justify an active approach, particularly for high-income investors paying the 3.8% NIIT on top of the 20% long-term capital gains rate.

A smart harvesting approach for Miami-based portfolios:

• Harvest throughout the year: Don’t wait for December. A position that’s down 15% in March might be flat by year-end. Capture the loss when it exists.
• Use tax-lot accounting: Your broker can sell specific lots (highest cost basis first) to maximize losses while keeping your overall position. Make sure you’re using “specific identification” rather than FIFO or average cost.
• Replace, don’t abandon: Sell the S&P 500 ETF from one provider and buy a near-identical one from another. You maintain market exposure while booking the loss. The 30-day clock starts, and after it expires, you can switch back if you prefer the original fund.
• Offset gains strategically: Short-term losses offset short-term gains first (taxed at up to 37%), giving you more bang per dollar. Long-term losses offset long-term gains first (taxed at up to 20%).

Watch Out for These Common Mistakes

Miami’s active trading community — especially the growing crypto and fintech crowd — tends to run into these wash sale pitfalls:

• Crypto wash sales: Starting in 2025, digital assets are subject to the wash sale rule. The old strategy of selling Bitcoin at a loss and buying it back the next day no longer works. Miami’s large crypto community needs to treat these transactions just like stock trades now.
• Cross-account buys: Selling in your taxable brokerage account while your 401(k) or IRA auto-invests in the same fund. Your retirement account’s automatic purchases can trigger a wash sale in your taxable account.
• DRIP programs: Dividend reinvestment plans purchase shares automatically. If you sell a stock at a loss and the DRIP buys shares of the same stock within 30 days, the wash sale rule applies.
• Spouse coordination: If you file jointly, your spouse’s purchase of a substantially identical security within the 61-day window triggers a wash sale on your loss.

Reporting Wash Sales on Your Return

Since Florida has no state income tax return, you only need to worry about federal reporting. Your broker reports wash sales on Form 1099-B using code “W” in Box 1f, with the disallowed amount in Box 1g.

You report all sales on Form 8949, then summarize on Schedule D (Form 1040). For wash sales, you’ll show the disallowed loss as an adjustment in column (g) of Form 8949. The adjustment increases your proceeds or decreases your cost basis — either way, the reported loss shrinks or disappears.

Keep in mind: brokers only track wash sales within a single account. If you have multiple brokerages, you need to identify and report cross-account wash sales on your own. This is where a good CPA earns their fee.