Tax Rules · USA

Wash Sale Rule for Traders Explained

Learn how the wash sale rule disallows tax deductions on losses when you buy substantially identical securities within 30 days before or after selling.

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Quick Answer

The wash sale rule disallows tax deductions on losses if you buy substantially identical securities within 30 days.

Key Rules

30-Day Window

You cannot claim a tax loss if you purchase a substantially identical security within 30 days before or after the sale that generated the loss. The window is 61 days total (30 before + sale day + 30 after).

Substantially Identical Securities

The rule applies when you buy the same stock, an option on the same stock, or a contract to acquire the same stock. Buying a different company in the same sector is generally not considered substantially identical.

Loss Deferred, Not Lost

A disallowed wash sale loss is not permanently lost. It gets added to the cost basis of the replacement shares, deferring the tax benefit to when you eventually sell those shares.

Applies Across Accounts

The wash sale rule applies across all your accounts, including IRAs, Roth IRAs, and spouse accounts. Selling at a loss in a taxable account and buying in an IRA within 30 days triggers a wash sale.

No De Minimis Exception

There is no minimum threshold. Even buying one share of a substantially identical security within the window triggers the rule for the corresponding portion of the loss.

Practical Examples

You sell 100 shares of TSLA at a $2,000 loss on March 15. On March 28, you buy 100 shares of TSLA again. The $2,000 loss is disallowed and added to the cost basis of your new shares.

You sell SPY at a loss and buy VOO (both S&P 500 ETFs) within 30 days. The IRS may consider these substantially identical, triggering a wash sale.

You sell a stock at a loss on December 15 and repurchase it on January 5. The loss is disallowed for the prior tax year, but the adjusted basis carries over to the new shares.

Who This Applies To

All US taxpayers who trade stocks, bonds, options, or other securities. This includes individual traders, married couples filing jointly, and entities controlled by the taxpayer such as IRAs.

How JournalPlus Helps

JournalPlus automatically flags potential wash sales by tracking your buy and sell activity across all logged positions. When you sell at a loss, JournalPlus checks your 61-day window for substantially identical purchases and alerts you before you file taxes. It also calculates your adjusted cost basis automatically, ensuring accurate tax reporting.

What Is the Wash Sale Rule?

The wash sale rule (IRC Section 1091) is a tax regulation that prevents traders from claiming artificial tax losses. Without this rule, a trader could sell a stock at a loss to get a tax deduction and immediately buy it back, maintaining their market position while reducing their tax bill.

The 61-Day Window

The wash sale window extends 30 days before and 30 days after the sale date, creating a 61-day total window. Many traders mistakenly think it only applies to purchases after the loss sale.

Before the sale: If you bought shares 30 days before selling at a loss, those pre-purchase shares can trigger a wash sale.

After the sale: Buying back within 30 days after the loss sale is the more commonly understood trigger.

How Cost Basis Adjustment Works

When a wash sale is triggered, the disallowed loss gets added to the cost basis of your replacement shares. This is important to understand because:

Your loss is deferred, not eliminated permanently
The higher cost basis means a smaller gain (or larger loss) when you eventually sell
The holding period of the original shares carries over to the replacement shares

Example Calculation

Step	Detail
Original purchase	100 shares at $50 ($5,000)
Sold at loss	100 shares at $40 ($4,000) = $1,000 loss
Repurchased within 30 days	100 shares at $42 ($4,200)
Adjusted basis	$4,200 + $1,000 = $5,200

Common Wash Sale Traps

Active traders frequently trigger wash sales without realizing it. Watch out for these scenarios:

Dividend Reinvestment Plans (DRIPs)

Automatic dividend reinvestments can trigger wash sales. If you sell a stock at a loss but your DRIP buys more shares within 30 days, you have a wash sale.

IRA Purchases

Buying the same security in your IRA within 30 days of a taxable loss sale triggers a wash sale. Worse, the loss may be permanently disallowed because you cannot adjust cost basis in an IRA.

Spouse Accounts

The IRS considers purchases by your spouse as your own for wash sale purposes when filing jointly.

Tracking Wash Sales Effectively

The complexity of wash sale tracking increases exponentially with trading volume. For active traders, manual tracking is nearly impossible. Key data points to monitor include:

Every lot purchased with exact dates and prices
All sales with corresponding cost basis
The 61-day window around every loss sale
Cross-account purchases including retirement accounts

A trading journal that automatically flags wash sales saves hours of manual reconciliation at tax time and prevents costly reporting errors.

This content is for educational purposes only and does not constitute legal or tax advice. Consult a qualified professional for advice specific to your situation.

Frequently Asked Questions

Does the wash sale rule apply to cryptocurrency?

As of 2025, the wash sale rule does not apply to cryptocurrency because crypto is classified as property, not a security. However, legislation has been proposed to extend wash sale rules to digital assets, so this may change in the future.

Can I avoid wash sales by waiting exactly 31 days?

Yes. If you wait at least 31 calendar days after selling at a loss before repurchasing the same security, the wash sale rule does not apply. Many traders set calendar reminders or use journal software to track their 30-day windows.

What happens if a wash sale spans tax years?

If you sell at a loss in December and repurchase in January within the 30-day window, the loss is disallowed for the year you sold. The disallowed loss adds to your cost basis on the replacement shares, potentially creating a larger gain or smaller loss when you eventually sell.

Stay Compliant With Your Journal

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