Hypothetically, a taxpayer sells 100 shares of an ETF, harvesting a long-term capital loss. Three weeks later, they receive 2.471 shares of the same ETF through the brokerage's automatic dividend reinvestment program.
Does that count as a wash sale in the same way as an intentional purchase would? And if it does count as a wash sale, does the investor lose all the tax benefit of the loss on the 100 shares, or only 2.471% of it to match the shares "purchased"?
Yes.
Only the loss on 2.471 shares is disallowed. But the tax benefit is not permanently lost. It's just deferred. The disallowed loss is added to the basis of the replacement shares (the newly purchased 2.471 shares). So it reduces the gain or increases the loss when those shares are eventually sold. The tax benefit of the disallowed loss is recovered when the replacement shares are sold.
You put "purchased" in quotation marks, but it's a real purchase, like any other. The investor had the option to take the dividend in cash instead of reinvesting it. The reinvestment was the investor's decision. It was not unintentional.
You can find more than you ever wanted to know about wash sales at the following link.
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