The wash sale rule (IRC Section 1091) is an IRS regulation that disallows a capital loss deduction when a trader sells a security at a loss and repurchases the same or substantially identical security within a 61-day window — 30 days before the sale, the day of the sale, and 30 days after. Active traders encounter this rule most dangerously at year-end, when tax-loss harvesting strategies can be quietly invalidated by a repurchase made just weeks into the new year.
Key Takeaways
- The window is 61 days total — 30 days before the sale, the day of sale, and 30 days after — not simply “30 days after” as commonly misquoted.
- The disallowed loss is added to the replacement shares’ cost basis, deferring the tax benefit rather than permanently eliminating it — except in the IRA cross-account trap.
- Traders who elect Section 475(f) mark-to-market accounting are fully exempt from wash sale rules, which is a defining advantage of Trader Tax Status.
How the Wash Sale Rule Works
Under IRC Section 1091, a wash sale occurs when three conditions are met: you sell a security at a loss, you buy a substantially identical security, and the repurchase falls within the 61-day window. IRS Publication 550 is the official guidance for individual traders.
The 61-day window is calculated as follows:
Wash Sale Window = [Sale Date − 30 days] through [Sale Date + 30 days]
A purchase on any day within that range — including 30 days before the loss sale — triggers the rule. Many traders are caught by the pre-sale portion: building a new position before closing a loser can retroactively trigger a wash sale on the loss.
When a wash sale occurs, the disallowed loss is added to the cost basis of the replacement shares. If you sold at a $25/share loss and immediately repurchased, your new cost basis increases by $25/share. The tax benefit isn’t destroyed — it’s deferred until you close the replacement position outside the wash sale window.
The IRA exception is the most dangerous trap. Under IRS Rev. Rul. 2008-5, if you sell at a loss in a taxable account and repurchase in a traditional IRA or Roth IRA, the wash sale applies but the basis adjustment is permanently lost. IRAs do not carry over adjusted cost basis, so the deferred loss vanishes entirely.
Substantially identical is interpreted broadly. Selling AAPL stock and buying AAPL call options or LEAPS almost certainly triggers the rule — the IRS has ruled that options on the same stock are substantially identical to the stock itself. Selling SPY and buying VOO (different funds tracking the same S&P 500 index) sits in a gray zone where the IRS has not issued definitive guidance, though many tax professionals treat it as a risk.
Crypto exception: As of 2026, cryptocurrency is not subject to the wash sale rule. IRS Notice 2014-21 classifies crypto as property, and no wash sale legislation has been enacted to cover digital assets. This means crypto traders can sell at a loss, immediately repurchase, and still claim the full tax deduction — a meaningful planning advantage unavailable in equity markets.
Practical Example
A trader buys 200 shares of NVDA at $120 per share ($24,000 total) in October. By December 20, NVDA has fallen to $95. The trader sells all 200 shares, realizing a $5,000 loss ($25/share × 200 shares), intending to use it to offset capital gains from earlier in the year.
On January 8 — just 19 days after the December 20 sale — the trader rebuys 200 NVDA shares at $98. Because January 8 falls within the 30-day post-sale window, the entire $5,000 loss is disallowed.
The $5,000 is added to the new cost basis:
Adjusted basis = $98/share + $25/share = $123/share
New total basis = $123 × 200 = $24,600
The loss isn’t gone permanently — when the trader eventually sells the new shares above $123, they recapture the benefit. But the 2025 tax deduction is lost. Had the trader waited until January 20 (31 days after December 20), the loss would have been fully deductible and the new shares would carry a cost basis of $98/share.
The wash sale rule stops traders from claiming a tax loss if they repurchase the same stock within 61 days — 30 days before or after the sale. The disallowed loss shifts into the new position’s cost basis, deferring the benefit rather than eliminating it permanently.
Common Wash Sale Mistakes
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Miscounting the window as 30 days forward only. The 61-day window extends 30 days in both directions from the sale date. A purchase made November 21 can trigger a wash sale on a December 20 loss sale — many traders never consider the pre-sale leg.
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Rebuying in an IRA to “avoid” the rule. Traders sometimes think routing the repurchase through a retirement account sidesteps the issue. It does not — and per IRS Rev. Rul. 2008-5, the basis adjustment is permanently lost because IRAs don’t track it.
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Assuming brokers catch everything. Brokers report wash sales on Form 1099-B, but only within a single account. Cross-account wash sales — between two taxable accounts at different brokers, or between a taxable account and an IRA — are the trader’s sole responsibility to track.
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Ignoring substantially identical securities. Switching from the losing stock to its options, or moving between near-identical index ETFs, may not create the clean break traders assume. When in doubt, move into a clearly different position for the 30-day cooling period.
How JournalPlus Tracks the Wash Sale Rule
JournalPlus logs every trade with entry date, exit date, and security ticker, giving you a timestamped record that makes it straightforward to identify potential wash sales across your trading history. At year-end, filtering your trade log by ticker lets you spot loss sales and check whether any matching repurchases fall within the 61-day window — work that would otherwise require manually reconciling brokerage statements. Because backtesting and tax review both depend on accurate trade records, maintaining a complete journal is the foundation of wash sale compliance for active traders.
