Pennsylvania Wash Sale Rules: Tax Loss Harvesting Opportunities and Risks

The original post describes a Pennsylvania resident harvesting a $12K loss by selling and immediately repurchasing a position to reduce 2025 PA state tax. The OP notes that Pennsylvania doesn’t disallow wash sale losses but also doesn’t allow loss carryovers, believing this strategy avoids resetting long-term holding clocks under IRS rules [1].

Key Reddit insights:

• Tax benefit calculation
  : One commenter calculated the PA tax benefit at approximately $364 (3% of $12K), questioning whether this small benefit justifies the strategy
• Federal consequences
  : Critics highlighted that while PA allows the loss, federal wash sale rules still apply, deferring the loss and increasing basis
• Alternative strategy
  : A user suggested selling and buying a similar ETF for 31 days to capture both PA and federal losses, rather than immediate repurchase
• OP’s rationale
  : The OP confirmed having significant PA gains to offset this year, making the timing advantageous despite the modest state benefit
• Holding period concern
  : Discussion centered on whether the strategy preserves long-term holding periods for federal tax purposes

Pennsylvania’s tax treatment of wash sales is genuinely unique compared to federal and most state approaches:

• Nonconforming rules
  : Pennsylvania does NOT conform to federal wash sale rules - losses are NOT disallowed for state tax purposes [2]
• No carryovers
  : Pennsylvania does NOT allow carryover of losses to future tax years, creating a “use it or lose it” situation
• Strategic implications
  : Tax loss harvesting strategies can be more advantageous in PA due to these differences, but require careful timing
• Limited documentation
  : Despite extensive research, few real-world examples or case studies exist of Pennsylvania taxpayers implementing this strategy
• Professional awareness
  : Tax professionals acknowledge PA’s unique treatment but detailed implementation guidance is scarce

The Reddit discussion and research findings align on Pennsylvania’s unique wash sale treatment but reveal important strategic considerations:

• PA allows immediate wash sale loss recognition for state tax purposes
• Federal wash sale rules still apply, creating a dual-tax system
• The strategy requires significant PA gains in the same year to be worthwhile
• No loss carryovers in PA create urgency for implementation

The Reddit user’s approach of immediate repurchase maximizes PA benefit but minimizes federal benefit. The alternative ETF swap strategy mentioned in comments could potentially capture both state and federal losses, though this requires more complex execution and carries market timing risk.

• Low tax benefit
  : At 3% state tax rate, $12K loss yields only ~$364 PA tax savings
• Federal deferral
  : The same loss gets deferred federally, potentially reducing overall tax efficiency
• Market risk
  : Immediate repurchase exposes investors to continued market volatility

• Tax arbitrage
  : Ability to claim losses for PA purposes while deferring federally
• Holding period preservation
  : Potential to maintain long-term capital gains status for federal purposes
• Strategic timing
  : Particularly valuable in years with significant PA capital gains

• Limited documentation
  : Few precedents or professional guidance on optimal implementation
• Complex compliance
  : Managing dual tax systems requires careful record-keeping
• Modest returns
  : State tax benefits may not justify the complexity and market exposure
• Regulatory changes
  : Pennsylvania could conform to federal rules in future years

• Verify sufficient PA gains exist to offset harvested losses
• Consider the 31-day ETF swap strategy for dual benefit
• Maintain detailed records for both state and federal filings
• Consult tax professionals familiar with Pennsylvania’s unique rules

While Pennsylvania’s wash sale treatment creates legitimate tax optimization opportunities, the practical benefits appear modest relative to the complexity and risks involved. The strategy makes most sense for investors with substantial PA gains in the current year and who can efficiently manage the dual-tax compliance requirements. The limited real-world examples suggest this remains an underutilized niche strategy that requires careful cost-benefit analysis before implementation.