Wash Sale Rule
An IRS rule that disallows a capital loss deduction if you buy a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the new shares.
The wash sale rule prevents taxpayers from claiming a tax deduction on a loss if they purchase a substantially identical security within 30 days before or after the sale. The rule applies to stocks, bonds, mutual funds, ETFs, and options. Its purpose is to prevent investors from selling at a loss for the tax benefit while immediately repurchasing the same investment.
The 30-day window runs in both directions — 30 days before and 30 days after the sale — creating a 61-day total wash sale window. "Substantially identical" is broadly interpreted: buying the same stock, a contract to acquire the same stock, or a very similar mutual fund can trigger the rule.
When a wash sale occurs, the disallowed loss is not permanently lost. Instead, it is added to the cost basis of the replacement shares. This means you will eventually recognize the loss when you sell those replacement shares (assuming you do not trigger another wash sale). The holding period of the original shares also transfers to the new shares. Your brokerage reports wash sales on Form 1099-B.
Related Terms
Capital Gains
The profit from selling a capital asset (stocks, real estate, etc.) for more than its purchase price. Capital gains are classified as short-term or long-term based on holding period.
Cost Basis
The original purchase price of an asset (plus adjustments like commissions and reinvested dividends), used to calculate capital gain or loss when you sell.
Short-Term Capital Gains
Profits from selling assets held for one year or less, taxed at ordinary income tax rates (10% to 37%). There is no preferential rate for short-term gains.