Wash Sale Rule

The wash sale rule applies to a 61-day window centered on the sale date:

• 30 days before the sale: If you bought the same stock within 30 days BEFORE selling at a loss, the loss is disallowed. This catches traders who buy shares first and then sell older shares at a loss.
• The sale date itself
• 30 days after the sale: If you buy the same stock within 30 days AFTER selling at a loss, the loss is disallowed. This is the more commonly understood trigger.

The window is based on trade dates, not settlement dates. The 30-day count includes weekends and holidays.

Example: You sell 100 shares of AAPL on March 15 at a $2,000 loss. If you buy ANY shares of AAPL between February 13 and April 14, the $2,000 loss is disallowed. The disallowed loss is added to the cost basis of the new shares. So if you bought those new shares at $150, your adjusted cost basis becomes $150 + $20/share = $170/share.

The IRS has not provided a clear definition of "substantially identical," which creates gray areas. Here is what is generally accepted:

Clearly triggers wash sale:

• Same stock (selling and rebuying AAPL)
• Options on the same stock (selling AAPL stock and buying AAPL call options)
• Buying in a different account (selling AAPL in your taxable account and buying in your IRA within 30 days)
• Automatic dividend reinvestment (DRIP) purchases within the window

Generally does NOT trigger wash sale:

• Selling one stock and buying a different stock in the same sector (selling AAPL and buying MSFT)
• Selling a broad index ETF and buying a different index (selling SPY and buying VTI, though this is debated)
• Selling stock and buying bonds of the same company

Gray areas (consult a tax professional):

• Selling one S&P 500 ETF and buying another (e.g., SPY vs VOO) — both track the same index but are different securities. The IRS has not explicitly ruled on this.
• Selling stock and buying deep in-the-money options on the same stock
• Selling a mutual fund and buying an ETF that tracks the same index

For active day traders, wash sales create significant tax complications:

Repeated disallowances: If you trade the same stock multiple times within 30 days (common for day traders who have favorite tickers), every loss can potentially become a wash sale. You might have $50,000 in gross trading losses but only $20,000 in deductible losses because the rest were disallowed.

Phantom income problem: Disallowed losses increase the cost basis of replacement shares. If you keep trading the same stock, the adjusted cost basis can climb far above the market price, creating a situation where your broker reports large capital gains on your 1099-B even though your actual P&L was break-even or negative.

Year-end trap: The most dangerous scenario: you have a losing position on December 15 and sell for a tax loss. Then on January 5, you buy the same stock back (within 30 days). The December loss is disallowed, and the adjusted cost basis carries over to the new shares — which are now in the next tax year. You lose the tax benefit entirely for the current year.

Section 475(f) election: Active traders can elect mark-to-market tax treatment under Section 475(f). This converts all trading gains and losses to ordinary income/loss and exempts you from wash sale rules entirely. The election must be filed by April 15 of the year BEFORE it takes effect. Consider this if wash sales are significantly impacting your tax situation.

Wait the full 31 days: The simplest solution — after selling at a loss, wait 31 calendar days before repurchasing. This is straightforward but means you lose exposure to the stock during that period.

Substitute with a correlated but different security: Sell the losing position and immediately buy a similar but not substantially identical security. For example, sell an individual tech stock and buy a tech sector ETF (QQQ). You maintain market exposure while the 30-day window passes. After 31 days, you can swap back.

Harvest losses in December, do not rebuy until February: Plan your tax-loss harvesting for early-to-mid December and avoid repurchasing until after the 31-day window closes in January.

Use separate accounts carefully: Remember that the wash sale rule applies across ALL your accounts, including IRAs and 401(k)s. Selling a stock at a loss in your taxable account and buying it in your IRA within 30 days triggers a wash sale — and the loss is permanently disallowed (not just deferred) because you cannot adjust the cost basis in a retirement account.

Track wash sales systematically: Use trading journal software that flags potential wash sales automatically. Do not rely on your broker's 1099-B wash sale reporting alone — brokers are only required to report wash sales within the same account, not across accounts.