Strategic wash sales to increase tax loss harvesting on recurring deposits by up to 16%
In Frec’s pursuit to make direct indexing as easy as buying an ETF, we have developed a brand new feature: strategic wash sales.
Strategic wash sales, when enabled, allow the direct index model to trade beyond traditional restrictions with standard wash sale rules. Specifically, this feature allows for the model to incur BUY-BUY-SELL wash sales. By allowing the model to trade this way, deposit frequency (i.e. Weekly, Monthly, Quarterly) becomes a near irrelevant consideration. This feature allows the investor to prioritize what deposit frequency is convenient for them, and not worry about how it will impact their tax loss harvesting performance, bringing the direct indexing experience one step closer to an ETF.
The IRS prohibits claiming a loss when a security is sold at a loss and then repurchased within 30 days before or after the sale1. In these cases, investors must adjust the cost basis of the replacement shares and report a disallowed loss rather than immediately claiming the tax-loss.
There are two types of transactions that can trigger wash sale treatment:
1. BUY-SELL-BUY wash sales – Frec prevents these trades
These occur when a sell event reports a loss on the Frec dashboard, but a subsequent purchase (potentially days later) triggers the wash sale rule, causing the previously reported loss to be disallowed. Frec’s algorithm attempts to completely avoid these wash sales because they would reduce or eliminate already realized losses.
2. BUY-BUY-SELL wash sales – Frec allows customers to opt-in to take these trades
These occur when additional shares are purchased before selling existing shares at a loss. It so happens that customers with frequent deposits naturally purchase shares of the same symbol repeatedly, hence getting into BUY-BUY scenarios. Many providers prevent a sale after two buy events, but Frec is now giving customers the option to take a strategic wash sale and sell. It’s important to note that taking this wash sale is net neutral from a customer’s perspective in terms of immediate losses harvested (no realized losses are clawed back). The wash sale rule will disallow some or all of the losses from your sale if you bought any of those positions 30 days prior. The disallowed loss will be added back into the cost basis (i.e., steps up your cost basis) of those positions recently bought. This simply defers your disallowed losses and increases your opportunity to tax loss harvest in the future.
Strategic wash sales only apply to the second scenario, allowing customers to benefit from BUY-BUY-SELL transactions without clawing back already reported losses. This feature enables customers to make frequent deposits without negatively impacting tracking error and while providing opportunity to increase average tax loss harvesting opportunities by up to 15.5% for weekly deposits and up to 13.7% for monthly small to medium-sized deposits when investing in the S&P 500.2
While strategic wash sales provide significant advantages for accounts with recurring deposits, they can also benefit accounts that reinvest dividends. When dividends are automatically reinvested, they purchase additional shares of the index which can inadvertently block tax loss harvesting. By enabling strategic wash sales, investors can avoid these restrictions.
Rest assured that Frec handles all the heavy lifting! All transactions executed are fully compliant with current IRS regulations. Our system also accounts for the change in cost basis and generates comprehensive tax reporting documentation, making tax season hassle-free for you and your accountant.
Take advantage of strategic wash sales today by simply visiting your account settings and enabling this powerful feature with a single click—or activate it during your recurring deposit setup. At Frec, we continuously push the boundaries of what’s possible with direct indexing, delivering a sophisticated yet intuitive solution that puts institutional-grade tax optimization at your fingertips.
