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Wash sales

Learn what a wash sale is, how Frec's algorithm tries to avoid them, and how Auto Convert and ETF-to-stock moves can affect them.

Understanding wash sales

A wash sale occurs when you buy the same security, or a "substantially identical" security, within 30 days before or after the date you sold an investment at a loss. When a wash sale occurs, the loss on the sale can't be used to offset gains or reduce taxable income, and is instead added back to your cost basis.

For example, say you buy 10 shares of ABC stock for $100 per share ($1,000 total). One year later, the stock price drops, and you sell your 10 shares for $80 per share (a $200 loss). Within 30 days, you buy 10 shares of ABC again at $60 per share ($600 total). This triggers a wash sale: the $200 loss is added back to the cost basis of your new ABC shares, increasing it from $600 to $800.

How Frec avoids wash sales

Our direct indexing algorithm attempts to avoid wash sales in your direct indexing portfolio automatically. Our system can't account for trades made:

  • In accounts you hold outside of Frec
  • In accounts held by your spouse or other household members (whether at Frec or elsewhere)

These external trades may trigger wash sales that affect your direct indexing portfolio. We also can't prevent wash sales if you manually execute trades in your self-managed account that conflict with your direct indexing positions.

Auto convert and wash sales

If you use Auto convert in your self-managed portfolio, keep in mind that Frec doesn't monitor for purchases you make of a security once it's enrolled. If you buy more of that security around the same time it's sold at a loss through Auto Convert, that purchase could trigger a wash sale.

ETFs and their underlying index

In general, an ETF and the individual stocks that make up its underlying index are treated as different types of securities, not substantially identical ones, so moving between them typically wouldn't trigger a wash sale. This reflects the standard tax treatment the direct indexing industry relies on, rather than a specific IRS ruling on this exact comparison.

Frec doesn't provide tax advice, and you should consult your own tax advisor for your specific situation. This material was prepared for informational purposes only.