What is the Wash Sale Rule?
The wash sale rule prevents investors from claiming a tax loss on a security if they buy a "substantially identical" security within 30 days before or after the sale. This stops taxpayers from selling at a loss just to claim the deduction while immediately buying back the same investment.
The 61-Day Window
| Period | Days |
|---|
| Before sale | 30 days |
| Day of sale | 1 day |
| After sale | 30 days |
| Total window | 61 days |
What Triggers a Wash Sale
| Action | Wash Sale? |
|---|
| Sell stock at loss, buy same stock within 30 days | Yes |
| Sell stock at loss, buy call option on same stock | Yes |
| Sell stock at loss, spouse buys same stock | Yes |
| Sell stock at loss, IRA buys same stock | Yes |
| Sell stock at loss, buy different company's stock | No |
| Sell stock at loss, buy same company's bonds | Maybe |
"Substantially Identical" Securities
| Substantially Identical | NOT Substantially Identical |
|---|
| Same stock | Different company's stock |
| Options on same stock | Different sector ETF |
| Convertible bonds (sometimes) | Bond of same company (usually) |
| Same mutual fund | Similar but different mutual fund |
What Happens if You Trigger a Wash Sale
| Consequence | Effect |
|---|
| Loss Disallowed | Cannot deduct the loss this year |
| Basis Adjustment | Disallowed loss added to new shares' cost basis |
| Holding Period | New shares inherit original holding period |
| Loss NOT Lost | Deferred to when new shares are sold |
Example
| Step | Event |
|---|
| 1 | Buy 100 shares of XYZ at $50 ($5,000 cost basis) |
| 2 | Sell 100 shares at $40 ($4,000 proceeds, $1,000 loss) |
| 3 | Within 30 days, buy 100 shares at $42 ($4,200) |
| 4 | Wash sale! $1,000 loss is DISALLOWED |
| 5 | New cost basis = $4,200 + $1,000 = $5,200 |
| 6 | When you eventually sell, you can use the $5,200 basis |
How to Avoid Wash Sales
| Strategy | Description |
|---|
| Wait 31+ days | Buy back after the window closes |
| Buy different security | Similar but not substantially identical |
| Harvest losses in December | Plan before year-end |
| Use different accounts | Be carefulāspouse/IRA can trigger |
Special Considerations
| Situation | Rule |
|---|
| Retirement Accounts | Buying in IRA can trigger wash sale on taxable account |
| Spouse Accounts | Spouse purchases can trigger wash sale |
| Gains | Wash sale rule does NOT apply to gains |
| Crypto | Currently NOT subject to wash sale rule (may change) |
Common Mistakes
- Buying back too soon (within 30 days)
- Forgetting about automatic dividend reinvestment
- Spouse buying same security
- Buying in IRA within 30 days of selling in taxable account
Exam Alert
Wash sale = 30 days BEFORE or AFTER sale (61-day window). Loss is DISALLOWED but added to cost basis of new shares. Rule applies to spouse and IRA purchases. Does NOT apply to gains!