12.1 Wash-Sale Basis Adjustments
Key Takeaways
- IRC §1091 disallows a loss on stock or securities if the taxpayer buys substantially identical stock or securities, or a contract or option to acquire them, within 30 days before or after the sale — a 61-day window.
- The disallowed loss is added to the basis of the replacement shares under §1091(d); the holding period of the sold shares tacks onto the replacement shares under §1223(3).
- Wash sale is a loss rule only: a gain on stock is recognized even if the taxpayer reacquires the same shares the next morning.
- Section 1091 applies to individuals and corporations; it does not apply the same way to a dealer who sustains the loss in the ordinary course of a stock-or-securities business.
- Same-class common of the same issuer is substantially identical; common of different issuers, and common versus nonconvertible preferred of the same issuer, ordinarily are not.
12.1 Wash-Sale Basis Adjustments
The AICPA REG blueprint (Area III, Group A) tests whether a newly licensed CPA can calculate the basis of stock acquired through a wash sale. The skill is basis. The later loss-limitation chapter will reuse wash sales as a disallowed-loss category, next to hobby losses and personal-use losses. Here, given a sale and a nearby reacquisition, you compute the replacement shares' basis and their holding period.
The 61-day window (§1091(a))
§1091(a) disallows a deduction for a loss from the sale or other disposition of shares of stock or securities if, within a period beginning 30 days before the date of the sale and ending 30 days after that date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized), or has entered into a contract or option so to acquire, substantially identical stock or securities. Count both flanks of the sale date: 30 days before + the sale date + 30 days after = a 61-day window. A repurchase on day 31 after the sale is outside the statute. A purchase 10 days before the loss sale is inside it. The buy-first-then-sell pattern is still a wash sale.
Wash sale is a loss rule. A taxpayer who sells stock at a gain and rebuys the same stock the next morning recognizes the gain. Do not import §1091 into a gain fact pattern.
The disallowance applies to individuals and corporations. It does not apply in the same way to a dealer in stock or securities when the loss is sustained in a transaction made in the ordinary course of that dealer's business. An investor, a trader who is not a dealer, and a C corporation holding a portfolio of marketable stock are all inside §1091. A broker-dealer that sells inventory stock at a loss and restocks the same CUSIP the next day is generally outside the disallowance, because that is the ordinary course of the dealer business.
The statute is limited to stock or securities. Buying a call option, entering a futures contract, or otherwise contracting to acquire the same stock is itself an acquisition. Ordinary digital assets that the IRS treats as property (Notice 2014-21) are not stock or securities, so §1091 does not automatically disallow a spot-crypto loss followed by a same-day repurchase — unless the instrument is itself a stock or security, such as shares of a spot Bitcoin ETF. Draft proposals to extend §1091 to digital assets were not enacted in the One Big Beautiful Bill Act (signed July 4, 2025). REG tests current law.
Substantially identical
Substantially identical is a facts-and-circumstances test. REG uses a short, stable catalog from the statute, the regulations, and IRS Publication 550:
| Pair | Generally substantially identical? |
|---|---|
| Same common stock, same issuer, same class | Yes — the core wash sale |
| Common stock of Corporation A vs. common stock of Corporation B | Ordinarily no, even if the issuers compete in the same industry |
| Common vs. preferred, or common vs. bonds, of the same issuer | Ordinarily no |
| Convertible preferred or convertible bonds vs. that issuer's common | Can be yes, if conversion terms, relative values, and price movement make them economically equivalent |
| Predecessor and successor shares in a reorganization | Can be yes |
| Sale of common plus purchase of a call (or other contract to buy that common) | The option or contract is an acquisition of substantially identical stock |
Selling Ford common at a loss and buying GM common is not a wash sale. Selling Acme common and buying Acme nonconvertible preferred is ordinarily not a wash sale. Selling Acme common and buying a call on Acme common is.
What the disallowed loss does to basis (§1091(d))
The loss is not erased. §1091(d) provides that the basis of the replacement stock is the basis of the stock sold, increased or decreased by the difference between the price of the replacement and the price at which the old stock was sold. Equivalently — and this is the formula REG items usually want — add the disallowed loss to the cost of the replacement shares.
If the taxpayer sells more shares than are replaced inside the window, only the replaced quantity is a wash sale. Match replacement purchases to sold shares beginning with the earliest replacement purchase in the window. Unmatched sold shares produce a currently allowed loss. If the taxpayer sells 100 and buys 100, the entire realized loss is parked in the new lot. If the taxpayer sells 100 and buys 40, 40 percent of the loss is disallowed and 60 percent is allowed currently.
A purchase by the taxpayer's spouse, or in another account the taxpayer owns, still counts. Rev. Rul. 2008-5 is the one wash sale that truly destroys basis: selling stock at a loss in a taxable brokerage account and buying the same stock inside an IRA (traditional or Roth) within the window disallows the loss, and no basis adjustment attaches to the IRA shares. The loss is gone, not parked.
Holding period tacks (§1223(3))
§1223(3) tacks the holding period of the sold shares onto the replacement shares. Replacement stock purchased yesterday can already be long-term if the sold lot was held long-term. Basis and holding period travel together on a REG simulation. That tacking can convert what looks like a one-day holding period into a long-term holding period when the replacement lot is later sold in a clean transaction.
Worked scenario: 100 shares, basis $50, $10 loss, replacement at $41
Facts. On June 10, Taylor, a calendar-year individual who is not a dealer, sells 100 shares of Blue Co. common. Adjusted basis is $50 per share. Amount realized is $40 per share, so the realized loss is $10 per share ($1,000 total). On June 20 — 10 days later — Taylor buys 100 shares of Blue Co. common for $41 per share. Taylor has no other Blue Co. positions and does not buy Blue Co. stock inside an IRA.
Analysis.
- The June 20 purchase is inside the 61-day window and is the same class of the same issuer. The entire $1,000 realized loss is disallowed under §1091(a).
- Replacement basis under §1091(d): cost $41 plus disallowed loss $10 = $51 per share. (Check: old basis $50 + ($41 repurchase − $40 sale price) = $51.) Total replacement basis is $5,100.
- The holding period of the June 20 lot includes the holding period of the June 10 sold lot (§1223(3)).
- If Taylor had sold the 100 shares at $55, the $5 per-share gain would be recognized in full. Wash sale does not defer gains.
- If Taylor had replaced only 40 shares on June 20, only $400 of the $1,000 loss would be disallowed. Those 40 shares would take basis of $41 + $10 = $51, and the unmatched 60 shares would produce a currently deductible $600 loss.
- If the June 20 purchase had been 100 shares of Blue Co. nonconvertible preferred, the common-stock loss would generally be allowed.
Report the disallowed amount as a wash-sale adjustment on Form 8949; the tested REG skill is the $51 basis, not the form coding.
On June 10, Taylor, a calendar-year individual who is not a dealer, sells 100 shares of Blue Co. common. Adjusted basis is $50 per share and the amount realized is $40 per share, producing a $10 per-share ($1,000) realized loss. On June 20 Taylor buys 100 shares of Blue Co. common for $41 per share. Taylor has no other Blue Co. positions. What is the federal income tax result?
Which statement correctly describes the scope of the wash-sale rule in IRC §1091?
On November 20, a calendar-year individual sells 100 shares of listed common stock in a taxable brokerage account at a $4,000 loss. The shares had been held for 14 months. On December 5 the same individual causes a Roth IRA to purchase 100 shares of the same common stock. Separately, another taxpayer sells 50 shares of listed common that had been held 11 months at a $2,000 loss and, five days later, purchases 50 shares of the same common in the same taxable account. Which statement is correct?