Wash-sale rule

The wash-sale rule is an IRS restriction on capital loss deductions. If you sell a security at a loss and repurchase the same or a substantially identical security within 30 days (before or after the sale), the loss is disallowed and added to the cost basis of the new purchase. This rule prevents investors from selling losers purely for tax deductions while maintaining their market exposure.

How wash-sale works

Suppose you own Microsoft stock bought at $300 that is now worth $250. You want to harvest the $50 loss (to offset gains elsewhere) but maintain your Microsoft exposure. You sell at $250.

Without wash-sale risk, you could immediately repurchase. Loss is deducted; position is maintained.

With wash-sale, if you repurchase within 30 days, the loss is disallowed. Instead of having a $50 loss to deduct, you have zero. Moreover, the $50 loss is added to your new cost basis, making it $300 again ($250 + $50 disallowed loss). You have deferred (not eliminated) the tax.

The 30-day window

The window extends 30 days before the sale and 30 days after the sale—a total of 61 days if you count both endpoints. Buy back on day 31 after sale, and you are safe. Buy back on day 30, and you trigger wash-sale.

The counting starts on the date you sell, not the settlement date, though the settlement date is what matters for cost basis tracking.

What is “substantially identical”

The IRS is vague on “substantially identical,” but the broad rule is: the same stock is obviously substantially identical to itself. Buying a different class of stock in the same company (Class A vs. Class B) is usually fine. Buying a stock and repurchasing call options on it might trigger wash-sale; consult a tax professional.

For ETFs: Commonly, investors replace a broad index ETF like SPY with a similar one like IVV (same index, different fund). This is a gray area. The IRS has indicated that very similar ETFs tracking the same index are substantially identical. Playing it safe, wait 30 days.

Applying to dividends and reinvested gains

If you sell a stock at a loss and the company pays a dividend during the 30-day window, does the dividend trigger wash-sale? No—receiving a dividend on the same stock is not a purchase, so it does not trigger the rule.

However, if you reinvest that dividend (buying more shares through a dividend reinvestment plan during the window), that could trigger wash-sale. Consult your broker.

Common strategies to avoid wash-sale

Wait 31 days. The simplest approach: sell at a loss and wait over a month to repurchase. This works but forgoes tax-loss harvesting during volatile markets.

Buy a different but similar security. Sell your position in SPY (S&P 500 ETF), and buy IVV or VOO (similar ETFs). All track the S&P 500. This is a gray area but generally safer than an exact replacement.

Double the position. Sell your losing stock and immediately buy twice as much. Then after 30 days, sell half. Net result: you harvested a loss and maintained exposure, but with some inefficiency.

Use a spousal account. If your spouse’s account buys the security during the 30-day window, it does not trigger your wash-sale. The rule applies per taxpayer, not per household, though coordination is needed.

IRS tracking and compliance

The IRS uses brokers’ reports to cross-check for wash-sales. If you report a loss on Schedule D but your broker reports a repurchase of substantially identical securities within 30 days, the IRS may disallow your loss and assess a penalty.

Most brokers now track wash-sales automatically and will flag a transaction or add the loss to the new cost basis.

See also