Wash sale rule
An IRS rule that disallows a loss on a sale if the same or a substantially identical security is bought within 30 days before or after it.
What it means
The wash sale rule stops investors from claiming a tax loss while keeping essentially the same position. If a security is sold at a loss and the same or a substantially identical one is bought within 30 days before or after the sale, a window of 61 days in total, the loss cannot be deducted at that time.
The loss is not gone for good. It is added to the cost basis of the replacement shares, and the holding period of the old shares carries over, so the benefit returns when the new shares are eventually sold. The rule can be triggered by purchases in a spouse’s account or in an IRA, and in the IRA case the loss may be lost permanently. Exactly what counts as substantially identical is not fully defined, which is why many investors switch to a similar but different fund.
Example
Suppose someone buys shares for $5,000, sells them for $4,000 at a $1,000 loss and buys the same shares back 10 days later for $4,100. The $1,000 loss is disallowed for now, and the new shares get a basis of $4,100 + $1,000 = $5,100.
How it’s used
- Planning tax-loss harvesting
- Selling and rebuying a holding near year-end
- Coordinating trades across several accounts
Good to know
- Automatic dividend reinvestment within the 30-day window can trigger a partial wash sale.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.