The Wash Sale Rule Explained

The 61-day window

A wash sale occurs when a security is sold at a loss and substantially identical securities are bought within 30 days before or after the sale. Including the sale date, that makes a 61-day window.

The rule looks across the taxpayer's accounts, and also applies to purchases by a spouse or a controlled corporation.

What happens to the loss

The loss is not permanently lost in most cases. It is added to the basis of the replacement shares, and the holding period of the old shares carries over.

For example, an investor buys shares at $1,000, sells at $700, and rebuys ten days later at $750. The $300 loss is disallowed, and the new basis becomes $1,050.

Common traps

Automatic dividend reinvestment can trigger the rule. Buying the replacement in an IRA is worse, because the IRS treats the loss as permanently disallowed. Brokers only track wash sales within one account for identical securities, so taxpayers should check across accounts themselves.

What counts as substantially identical

Shares of the same company are substantially identical, as are options to buy those shares. Common stock and preferred stock of the same company are often not, unless the preferred is convertible and behaves like the common. Stock in a different company is generally not substantially identical, even in the same industry.

Funds are less clear. Two funds tracking the same index with different sponsors may raise a question, while funds tracking different indexes carry less risk. No bright-line IRS rule exists, so taxpayers need judgment and should document it.

A dated example

An investor buys 100 shares for $5,000. On November 20, they sell all 100 for $3,500, a $1,500 loss. On December 5, they buy 100 shares of the same stock for $3,800. The purchase is within 30 days, so the $1,500 loss is disallowed. The new shares have a basis of $5,300, and the holding period of the old shares is added on.

If they later sell at $5,500, the gain is only $200. The tax benefit of the loss was deferred, not removed, unless the replacement shares were bought in an IRA.

Partial wash sales and year-end

A wash sale can be partial. If 100 shares are sold at a loss and only 40 are repurchased, the loss on 40 shares is disallowed and the loss on the other 60 is allowed.

Year-end timing is a common trap. A loss sale on December 28, followed by a repurchase on January 10, is a wash sale. The loss does not reduce the earlier year's tax, even though the sale occurred in that year. Purchases before the sale also count, so buying more shares two weeks before selling an older lot can trigger the rule.

Reporting and avoiding wash sales

Form 1099-B shows wash sale amounts identified by the broker. On Form 8949, the adjustment is entered with code W. Taxpayers with several accounts must make their own adjustments, because each broker sees only its own account.

To keep a position while harvesting a loss, investors can wait 31 days, or buy a similar but not substantially identical investment. Traders who have made a valid Section 475(f) mark-to-market election are generally outside the wash sale rule.

Under current law, the rule refers to stock and securities, and digital assets treated as property are generally viewed as outside it. Proposals to change this have been made, so confirm the current position.

A preparer's checklist

List all loss sales for the year, then search for purchases of the same security in the 30 days before and after each one. Check every taxable account, spouse accounts, and IRAs, as well as dividend reinvestments and option trades.

Compare the results with the wash sale amounts on Form 1099-B, and enter any further adjustments on Form 8949. Update the basis and holding period of the replacement shares in your own records, because the broker will not know about cross-account matches.

Pay extra attention to the final weeks of December and the first weeks of January, where a repurchase can move a loss out of the year that the investor intended.

Frequently asked questions