Glossary term
Wash Sale
A wash sale occurs when an investor sells stock or securities at a loss and buys substantially identical stock or securities within the wash-sale window, causing the tax loss to be disallowed for current deduction purposes.
Updated
Read time
What Is a Wash Sale?
A wash sale occurs when an investor sells stock or securities at a loss and buys substantially identical stock or securities within the wash-sale window. Under U.S. tax rules, the loss is generally disallowed for current deduction purposes if the replacement purchase occurs within 30 days before or 30 days after the sale.
The rule is designed to prevent investors from claiming a tax loss while effectively keeping the same investment exposure. The loss is usually not gone forever; it is generally added to the basis of the replacement shares, which can affect gain or loss when those shares are eventually sold.
Key Takeaways
- A wash sale can disallow a current tax deduction for an investment loss.
- The window generally covers 30 days before and 30 days after the loss sale.
- The rule applies to stock and securities, including certain contracts and options.
- Purchases by a spouse or a corporation controlled by the investor can also matter.
- Wash-sale tracking is especially important during tax-loss harvesting and automatic reinvestment.
How the Rule Works
The wash-sale period is often described as a 61-day window: the sale date, the 30 days before it, and the 30 days after it. If an investor sells shares at a loss and buys substantially identical shares during that period, the loss is generally disallowed for that sale.
For example, suppose an investor sells 100 shares of a stock at a $2,000 loss and buys 100 substantially identical shares two weeks later. The investor generally cannot deduct the $2,000 loss immediately. Instead, the disallowed loss is added to the basis of the replacement shares, and the holding period can also be affected.
Tax-Loss Harvesting Trap
Wash sales often appear when investors try to harvest losses near year-end, rebalance a portfolio, or switch funds during a market decline. The trap is that the investor may think the loss is available to offset gains, while a replacement purchase has quietly blocked the deduction.
Automatic dividend reinvestment can also create problems. A small reinvestment into the same fund or stock during the wash-sale period may partially disallow a loss. Investors with multiple accounts should also watch taxable accounts, spouse accounts, and accounts managed on different platforms.
What Counts as Substantially Identical?
The hardest part of the rule is often the phrase substantially identical. Selling one company's stock and buying the same company's stock again is straightforward. Selling one S&P 500 index fund and buying a different S&P 500 index fund is more judgment-sensitive. Selling a broad U.S. total-market fund and buying a different but not identical broad-market fund may be less likely to create the same issue, but facts matter.
The IRS has not provided a simple universal list for every ETF, mutual fund, option, or derivative combination. That is why wash-sale decisions should be documented carefully when tax consequences are material.
The Bottom Line
A wash sale can turn an expected tax-loss deduction into a deferred basis adjustment. Investors who sell at a loss should check replacement purchases across accounts, reinvestment settings, options, and spouse-controlled activity before assuming the loss is currently deductible.