Understanding the Wash-Sale Rule
The wash-sale rule prevents investors from claiming a loss on a security they buy back shortly after selling. Here's how to avoid this costly mistake.
The Wash-Sale Rule
What Is the Wash-Sale Rule?
If you sell a security at a loss, you cannot claim the loss if you buy a 'substantially identical' security within 30 days before or after the sale.
The 61-Day Window
No repurchase within 30 days before the sale through 30 days after the sale (61-day window total).
What Happens to the Disallowed Loss?
The disallowed loss is added to the basis of the newly purchased shares. It's not gone forever — it defers the loss until you sell the replacement shares.
What Is 'Substantially Identical'?
- The same stock in the same company: Yes
- Different company in the same industry: No
- ETF vs. similar ETF from different provider: Generally no
- Bonds from the same company: Possibly yes
- Options on the same stock: Yes
Practical Examples
- Sell Apple at a loss, buy Apple 10 days later: Wash sale
- Sell S&P 500 ETF (SPY) at a loss, buy similar ETF (VOO): Generally not a wash sale
- Sell individual stock, buy sector ETF containing the stock: Generally not a wash sale
IRS Reporting
Your broker tracks wash sales and reports them on Form 1099-B (with a 'W' in Box 1f).
Year-End Consideration
Wash-sale rules span years. Selling in December and rebuying in January within 30 days still triggers wash-sale rules.
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