Wash Sale Rule
The wash sale rule prohibits investors from claiming a tax loss on a security if they purchase a substantially identical security within 30 days before or after the sale, disallowing the loss for tax purposes but adding it to the cost basis of the new shares.
🎬 Video Explanation
Exam Tip
Wash sale = 30 days before OR after (61-day window total). Substantially identical triggers rule. Loss is DEFERRED to new basis. IRA wash sale = permanent loss!
EA exam baseline: For the 2026–2027 SEE, use Tax Year 2025 and federal tax law through December 31, 2025. Later-year amounts below are explicitly labeled comparisons, not the default exam year. IRS SEE policy.
What is the Wash Sale Rule?
The wash sale rule is an IRS regulation that prevents investors from claiming artificial tax losses by selling a security at a loss and quickly repurchasing it. If you buy a "substantially identical" security within 30 days before or after selling at a loss, the loss is disallowed for tax purposes.
The 61-Day Window
| Period | Rule |
|---|---|
| 30 days before | Cannot buy substantially identical |
| Sale date | Day loss is realized |
| 30 days after | Cannot buy substantially identical |
| Total window | 61 days |
What Triggers a Wash Sale
| Action | Wash Sale? |
|---|---|
| Buy same stock within 30 days | Yes |
| Buy call option on same stock | Yes |
| Spouse buys same stock | Yes |
| Buy in IRA, sell in taxable | Yes |
| Buy "substantially identical" ETF | Maybe |
| Buy similar but different stock | No |
| Buy same stock in different sector ETF | Generally no |
What Is "Substantially Identical"?
| Substantially Identical | NOT Substantially Identical |
|---|---|
| Same stock | Different company same industry |
| Options on same stock | Index fund vs. individual stocks |
| Convertible to same stock | S&P 500 ETF vs. Total Market ETF |
| Preferred that converts to common | Gold stock vs. gold ETF |
Consequences of Wash Sale
| Effect | Description |
|---|---|
| Loss Disallowed | Cannot deduct loss on current tax return |
| Basis Adjustment | Disallowed loss added to new shares' basis |
| Holding Period | Tacks on to new shares |
| Not Lost Forever | Loss deferred, not eliminated |
Example
| Step | Details |
|---|---|
| 1 | Buy 100 shares XYZ at $50 = $5,000 basis |
| 2 | Sell 100 shares XYZ at $30 = $3,000 |
| 3 | Loss = $2,000 |
| 4 | Buy 100 shares XYZ at $32 within 30 days |
| 5 | Wash sale triggered |
| 6 | $2,000 loss disallowed for current year |
| 7 | New basis = $32 + $20 = $52 per share |
How to Avoid Wash Sales
| Strategy | Implementation |
|---|---|
| Wait 31 days | Don't repurchase for 31 days |
| Buy different security | Similar but not substantially identical |
| Sell before buying | Don't buy 30 days before selling |
| Tax-loss harvest properly | Replace with similar, not identical |
Wash Sales Across Accounts
The wash sale rule applies across:
- All your taxable accounts
- Your spouse's accounts
- Your IRA (loss permanently disallowed!)
IRA Wash Sale Warning
| Scenario | Consequence |
|---|---|
| Sell in taxable account at loss | Loss potentially disallowed |
| Buy same stock in IRA within 30 days | Loss PERMANENTLY disallowed |
| Reason | Cannot adjust basis in IRA |
Exam Alert
Wash sale = 30 days before AND after sale (61-day window). Buying "substantially identical" security triggers rule. Loss is DEFERRED, not lost (added to new basis). Applies across ALL accounts including spouse's. IRA wash sale = loss permanently lost!
Study This Term In
Course Playlist133 videosVideos133 videosBlogs33 blogs
Free CE RadioThird-party resources · We may earn a commission from purchases.
Series 7 Study Guide 2025-2026: Complete Review + 750 Questions and Detailed Answer Explanations (6 Full-Length Exams)
By Series 7 Team, Newstone
$44.51 · 
Take courses on Udemy
Prep course on Achievable
Online course on Mometrix
Free CEThird-party resources · We may earn a commission from purchases.
Series 66 Study Guide 2025–2026: 10 Full-Length Practice Tests, 1600+ Realistic Questions, Detailed Answer Explanations, and Proven Strategies to Pass the Uniform Combined State Law Exam
By Bean, Charles K.
$29.99 ·
Prep course on Achievable
Practice exams on ExamEdgeFlashcards on Mometrix
Related Terms
Capital Gain
A capital gain is the profit realized when an investment or asset is sold for more than its original purchase price, subject to taxation based on holding period.
Tax-Loss Harvesting
Tax-loss harvesting is a strategy of selling investments at a loss to offset capital gains or ordinary income, thereby reducing tax liability while maintaining market exposure by purchasing similar (but not substantially identical) investments.
Your AI study companion · 10 free interactions a day
Stay Updated
Get free exam tips and study guides delivered to your inbox.