What is the Wash Sale Rule

The wash sale rule disallows a claimed tax loss if you buy back the same or a substantially identical security within 30 days before or after selling it at a loss — designed to prevent "round-trip" loss harvesting without real change in position.

The wash sale rule is an IRS rule that disallows a tax loss on the sale of a security when you purchase the same or a substantially identical security within a 61-day window: 30 days before the sale, the day of the sale, or 30 days after the sale. A disallowed loss doesn't disappear permanently — it's added to the cost basis of the replacement securities — but it does postpone when the loss can be recognized, which reduces the benefit of tax-loss harvesting.

The rule aims to prevent investors from manufacturing paper losses for tax purposes while maintaining economic exposure to the same investment.

Example

Suppose you own 100 shares of a stock fund purchased for $10,000. The value drops to $7,000 and you sell to harvest the $3,000 loss. If you buy back shares of the same fund within 30 days of the sale:

Without wash sale rule: $3,000 loss is deductible (up to $3,000 against ordinary income, or against capital gains)
With wash sale triggered: The $3,000 loss is disallowed. Instead, $3,000 is added to your cost basis of the newly purchased shares. You'll eventually get the loss when you sell the replacement shares — but not this year.

What Is "Substantially Identical"

The IRS doesn't have a precise definition, but courts and IRS guidance indicate:

Clearly wash sales:

Buying shares of the exact same stock or fund you sold
Selling and buying shares in the same mutual fund class (e.g., investor shares vs. institutional shares of the same fund)
Options and warrants on the same stock (exercised within the window)

Generally NOT wash sales:

Selling a fund tracking the S&P 500 and buying a fund tracking a different index (e.g., total market, Russell 1000)
Selling shares of one company and buying shares of a competitor in the same industry
Selling and buying ETFs with similar but distinct holdings from different issuers

The "substantially identical" test requires legal and economic similarity — similar funds tracking different indices are generally considered not substantially identical, making index ETF swapping a popular tool for tax-loss harvesting without triggering the wash sale rule.

Cross-Account Wash Sales

The wash sale rule applies across all your accounts, not just a single account. If you sell a security at a loss in your taxable brokerage account and your spouse (or your IRA, 401(k), or other account you control) purchases the same security within the 61-day window, the wash sale rule can still be triggered.

This is particularly important because:

Automatic dividend reinvestment in a taxable account can inadvertently trigger a wash sale if you recently harvested losses in the same fund
Purchases in an IRA to replace harvested losses are a common mistake — the wash sale is triggered but the basis adjustment doesn't occur inside the IRA (essentially making the loss permanently lost)

What Happens to a Disallowed Loss

When a wash sale is triggered:

The disallowed loss is added to the cost basis of the replacement securities
The holding period of the original shares carries over to the replacement shares
The loss isn't gone — it effectively gets deferred until you sell the replacement shares without triggering another wash sale

Brokerage firms are required to track and report wash sales on Form 1099-B, but they only track wash sales within a single account. Cross-account wash sales are your responsibility to track and report.

Wash Sale Rule and Capital Gains Strategy

When tax-loss harvesting, the goal is to sell securities that have declined in value, realize the loss to offset gains (or up to $3,000 of ordinary income), and redeploy the proceeds into similar (but not substantially identical) investments to maintain your portfolio's market exposure. The wash sale rule is the primary constraint on this strategy — plan your rebalancing and reinvestment carefully around the 61-day window.