Wash Sale Rule Guide
The wash sale rule disallows a tax loss deduction if you sell a security at a loss and buy a substantially identical security within 30 days before or after the sale. Violating it can turn your planned tax loss into a deferred adjustment.
The rule is designed to prevent investors from selling investments at a loss for tax purposes while maintaining their economic position. If you sell XYZ stock at a $5,000 loss and buy back XYZ within 30 days (before or after the sale), the loss is disallowed for current tax purposes. Instead, the disallowed loss is added to the cost basis of the replacement shares, deferring the benefit until you eventually sell those shares.
For example, suppose you bought 100 shares of ABC Corp at $50/share ($5,000 total). The stock drops to $30, and you sell all 100 shares on December 15, realizing a $2,000 loss. On January 5 (21 days later), you buy back 100 shares at $32/share. Because you repurchased within 30 days, the $2,000 loss is disallowed. However, your new basis becomes $3,200 + $2,000 = $5,200, preserving the loss for when you eventually sell those shares.
The rule applies to stocks, bonds, mutual funds, ETFs, options, and most securities. It also applies across accounts, including IRAs. Selling at a loss in a taxable account and buying the same security in your IRA within 30 days triggers a wash sale, and the loss is permanently disallowed — it cannot be added to basis inside an IRA.
Avoiding Wash Sales During Tax-Loss Harvesting
To avoid wash sales while still harvesting losses, investors can buy a different but similar fund (e.g., swap S&P 500 ETF VOO for IVV or a large-cap growth fund), wait at least 31 days before repurchasing the original security, or buy a security that tracks a different index. Many robo-advisors and tax-loss harvesting services automate this by using paired ETF portfolios.
FAQs
What counts as a "substantially identical" security?
The IRS hasn't defined this precisely, but broadly it means the same security or one that is essentially identical in terms of rights and features. Different share classes of the same fund (e.g., VTSAX vs VTI) may be considered substantially identical, while two S&P 500 funds from different providers generally are not, though there's debate among tax professionals.
Does the wash sale rule apply to cryptocurrency?
As of 2025, the wash sale rule does not apply to cryptocurrency due to its classification as property rather than securities. However, proposed legislation could change this. For now, you can sell Bitcoin at a loss and immediately repurchase it without triggering a wash sale — though this is a potential area of future regulatory change.
Does the 30-day window apply to purchases before the sale?
Yes. The 30-day window includes both before and after the sale. If you bought shares on November 20 and sold identical shares at a loss on December 10 (20 days later), the wash sale rule still applies. The rule covers 61 total days: 30 before, the sale day, and 30 after.