Understanding the Wash Sale Rule
The wash sale rule is an IRS regulation (IRC Section 1091) that prevents taxpayers from claiming artificial losses by selling securities at a loss and immediately repurchasing them. If you sell a stock at a loss and buy the same or a substantially identical security within 30 days before or after the sale, the loss is disallowed for tax purposes in the current year.
The 61-Day Wash Sale Window
The wash sale rule applies to a 61-day period: 30 days before the sale, the day of the sale, and 30 days after the sale. If you purchase substantially identical securities at any point during this window, the wash sale rule is triggered.
The 61-Day Danger Zone
The yellow bar represents the danger zone. If you buy the same stock anywhere in this 61-day period, your loss is disallowed.
What Are "Substantially Identical" Securities?
The IRS has not provided a precise definition, but substantially identical securities generally include:
- The Same Stock: Selling and repurchasing shares of the same company (e.g., Apple Inc.) clearly triggers the rule.
- Call Options: Selling stock and buying call options on the same stock can trigger a wash sale.
- Contracts to Acquire: Any contract or option to acquire substantially identical stock counts.
- Preferred vs Common: Preferred and common stock of the same company may be substantially identical if convertible.
What Is NOT Substantially Identical
- •Different Companies: Selling Apple and buying Microsoft is fine, even if they're in the same sector.
- •Similar ETFs: Selling VOO (Vanguard S&P 500 ETF) and buying SPY (SPDR S&P 500 ETF) is generally acceptable, though this remains a gray area.
- •Bonds vs Stocks: Corporate bonds and stock of the same company are not substantially identical.
How the Wash Sale Rule Affects Taxes
Adjusted Cost Basis = Repurchase Price + Disallowed LossExample: You buy 100 shares at $50 ($5,000 total), sell at $40 ($4,000), losing $1,000. Within 30 days, you repurchase 100 shares at $42 ($4,200). The $1,000 loss is disallowed and added to your new cost basis: $4,200 + $1,000 = $5,200 adjusted basis.
When you eventually sell the repurchased shares, your adjusted cost basis will be higher, which reduces your taxable gain or increases your deductible loss. The disallowed loss isn't lost—it's deferred.
Strategies to Avoid Wash Sales
1. Wait 31 Days
The simplest strategy: wait 31 days after selling before repurchasing the same security. This ensures you're outside the 61-day window and can claim the loss immediately.
2. Buy a Similar, Not Identical, Security
Sell one stock and immediately buy a different (but similar) stock to maintain market exposure. For example, sell an S&P 500 ETF and buy a total market ETF, or sell one tech stock and buy a different tech stock.
3. Double Up, Then Sell
Buy additional shares first, wait 31 days, then sell the original lot at a loss. This lets you maintain your position while avoiding a wash sale. Note: this requires more capital upfront.
4. Harvest Losses Early in the Year
If you want to repurchase the same security, harvest losses in January or February. This gives you the rest of the year to repurchase without worrying about the prior-year wash sale window.
Common Mistakes to Avoid
- •Ignoring IRA Purchases: Buying the same security in your IRA within 30 days of selling in your taxable account triggers a wash sale. The loss is permanently disallowed because you can't adjust the cost basis of IRA holdings.
- •Spouse's Account: If your spouse buys the same stock in their account within the window, it's still a wash sale. The rule applies to you and your spouse.
- •Automatic Dividend Reinvestment: If you have DRIP enabled and dividends automatically purchase shares within the wash sale window, this can trigger the rule.
- •Counting Only After the Sale: Many investors forget the rule applies 30 days BEFORE the sale as well. If you bought shares in the 30 days before selling at a loss, it's a wash sale.
Tax Loss Harvesting and Wash Sales
Tax loss harvesting is a strategy where investors deliberately sell securities at a loss to offset capital gains. The wash sale rule is specifically designed to prevent abuse of this strategy. To successfully harvest losses:
- Identify Losses: Review your portfolio for positions trading below your cost basis.
- Sell at a Loss: Execute the sale to realize the loss for tax purposes.
- Wait or Substitute: Either wait 31 days to repurchase, or immediately buy a similar (not identical) security.
- Document Everything: Keep detailed records of purchase dates, sale dates, and repurchase dates for tax reporting.
Advantages and Disadvantages
Advantages of Understanding the Rule
- •Maximize Tax Deductions: Properly timing sales and repurchases lets you claim losses immediately.
- •Avoid IRS Penalties: Correctly applying the rule prevents disallowed loss claims that could trigger audits or penalties.
- •Strategic Portfolio Management: Use the rule to your advantage with tax loss harvesting strategies.
Disadvantages of the Rule
- •Loss Deferral: If triggered, you can't deduct the loss in the current year, delaying tax benefits.
- •Complexity: Tracking purchases across multiple accounts (taxable, IRA, spouse's accounts) is complicated.
- •Market Timing Risk: Waiting 31 days to repurchase exposes you to market movements that could work against you.
Reporting Wash Sales on Your Tax Return
Your broker should report wash sales on Form 1099-B with a "W" code in Box 1f. The disallowed loss is shown in Box 1g. You must report this information on Schedule D (Capital Gains and Losses) and Form 8949 (Sales and Other Dispositions of Capital Assets).
Important: Brokers only track wash sales within the same account. If you have multiple accounts (different brokers, IRA accounts, etc.), you're responsible for identifying and reporting wash sales across accounts yourself.
Frequently Asked Questions
Does the wash sale rule apply to gains?
No, the wash sale rule only applies to losses. If you sell a security for a gain and immediately repurchase it, there's no wash sale issue. The gain is fully taxable.
Can I trigger a wash sale by selling in December and buying in January?
Yes. The 61-day window spans across tax years. If you sell on December 15 and repurchase on January 10, that's only 26 days—the wash sale rule applies, and you can't claim the loss on your prior year's return.
What if I only repurchase some of the shares I sold?
The wash sale rule applies proportionally. If you sell 100 shares at a $1,000 loss and repurchase only 50 shares within 30 days, half the loss ($500) is disallowed and added to the cost basis of the 50 repurchased shares. The other $500 loss is allowed.
Does the wash sale rule apply to crypto?
As of 2025, the wash sale rule does NOT apply to cryptocurrency because the IRS treats crypto as property, not securities. However, proposed legislation could change this—consult a tax professional for current guidance.
What if I forget about the wash sale rule?
If you incorrectly claim a disallowed loss, the IRS may adjust your return and disallow the deduction, potentially assessing penalties and interest. Keep detailed records and work with a tax professional if you're unsure.
Can I avoid the rule by selling in one account and buying in another?
No. The wash sale rule applies to all accounts you control, including taxable brokerage accounts, IRAs, 401(k)s, and your spouse's accounts. Buying in a different account within the 61-day window still triggers the rule.
Plan Your Trades Carefully
Use this calculator before executing tax loss harvesting trades to ensure you don't accidentally trigger the wash sale rule. By understanding the 61-day window and planning your transactions strategically, you can maximize your tax deductions and avoid costly mistakes. Always consult with a qualified tax advisor for personalized guidance.