Wash Sale Rule
An IRS rule under Section 1091 that disallows a claimed capital loss if the investor purchases a substantially identical security within 30 days before or after the sale that generated the loss.
The wash sale rule is designed to prevent investors from claiming a tax loss while maintaining an essentially unchanged economic position in a security. If you sell shares at a loss and then repurchase 'substantially identical' securities within the 61-day window — 30 days before the sale, the day of the sale, and 30 days after — the IRS disallows the loss for current-year tax purposes.
The disallowed loss is not permanently forfeited. Instead, it is added to the cost basis of the newly acquired shares, effectively deferring the tax benefit until those replacement shares are eventually sold in a non-wash-sale transaction. Additionally, the holding period of the original shares carries over to the replacement shares, which can affect whether a future gain is short-term or long-term.
The rule applies to purchases in any account you control, including IRAs and spousal accounts under certain interpretations, though the IRS guidance on spousal accounts is less definitive. Buying replacement shares in a traditional or Roth IRA is particularly dangerous because when a wash sale occurs with an IRA repurchase, the disallowed loss disappears permanently — it cannot be added to the IRA's basis since IRAs do not track cost basis in the same way taxable accounts do.
'Substantially identical' is not perfectly defined by statute, but the IRS and courts have generally held that shares of the same company are substantially identical. Options to acquire the same stock can also trigger the rule. Switching between two different companies in the same industry — for example, selling one bank stock and buying another — does not trigger a wash sale. Similarly, selling a mutual fund and buying a different fund with similar (but not identical) holdings is generally safe.
Brokers report wash sales on Form 1099-B by marking affected transactions in box 1g, though they are only required to track wash sales within the same account and for covered securities. Investors who use tax-loss harvesting across multiple accounts must monitor wash sales manually, often with the help of tax software or a financial advisor.