Securities

Wash Sale Rule

The wash sale rule is an IRS regulation that disallows a tax deduction for a security sold at a loss if a substantially identical security is purchased within 30 days before or after the sale.

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Exam Tip

Wash sale = 30 days before OR after (61 days total). Loss is DEFERRED, not lost forever. Added to new cost basis.

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

PeriodDays
Before sale30 days
Day of sale1 day
After sale30 days
Total window61 days

What Triggers a Wash Sale

ActionWash Sale?
Sell stock at loss, buy same stock within 30 daysYes
Sell stock at loss, buy call option on same stockYes
Sell stock at loss, spouse buys same stockYes
Sell stock at loss, IRA buys same stockYes
Sell stock at loss, buy different company's stockNo
Sell stock at loss, buy same company's bondsMaybe

"Substantially Identical" Securities

Substantially IdenticalNOT Substantially Identical
Same stockDifferent company's stock
Options on same stockDifferent sector ETF
Convertible bonds (sometimes)Bond of same company (usually)
Same mutual fundSimilar but different mutual fund

What Happens if You Trigger a Wash Sale

ConsequenceEffect
Loss DisallowedCannot deduct the loss this year
Basis AdjustmentDisallowed loss added to new shares' cost basis
Holding PeriodNew shares inherit original holding period
Loss NOT LostDeferred to when new shares are sold

Example

StepEvent
1Buy 100 shares of XYZ at $50 ($5,000 cost basis)
2Sell 100 shares at $40 ($4,000 proceeds, $1,000 loss)
3Within 30 days, buy 100 shares at $42 ($4,200)
4Wash sale! $1,000 loss is DISALLOWED
5New cost basis = $4,200 + $1,000 = $5,200
6When you eventually sell, you can use the $5,200 basis

How to Avoid Wash Sales

StrategyDescription
Wait 31+ daysBuy back after the window closes
Buy different securitySimilar but not substantially identical
Harvest losses in DecemberPlan before year-end
Use different accountsBe careful—spouse/IRA can trigger

Special Considerations

SituationRule
Retirement AccountsBuying in IRA can trigger wash sale on taxable account
Spouse AccountsSpouse purchases can trigger wash sale
GainsWash sale rule does NOT apply to gains
CryptoCurrently 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!

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