How Does the Wash Sale Rule Work?
If you sell a stock at a loss and repurchase it (or a substantially identical security) within the 61-day window — 30 days before through 30 days after the sale — the loss is disallowed for tax purposes. The disallowed loss is added to the cost basis of the replacement shares, deferring (not eliminating) the tax benefit until you eventually sell without triggering another wash sale.
What Counts as Substantially Identical?
The IRS has not defined this term precisely, but it generally includes: the same stock, options on the same stock, and contracts to acquire the same stock. Buying a different company's stock in the same sector is not a wash sale. Whether index funds tracking the same benchmark qualify as substantially identical remains a gray area — consult a tax professional.
How Does the Wash Sale Rule Affect Tax-Loss Harvesting?
Effective tax-loss harvesting requires navigating wash sales carefully. A common strategy is to sell a losing position and immediately buy a similar but not identical fund — for example, swapping one S&P 500 ETF for a total market ETF. This maintains market exposure while realizing the tax loss legally.
Frequently asked questions
Does the wash sale rule apply across accounts?
Yes. The rule applies across all your accounts, including IRAs and your spouse's accounts. Selling a stock at a loss in a brokerage account and buying it in your IRA within 30 days triggers a wash sale, and the loss is permanently disallowed.
Do wash sales apply to cryptocurrency?
Historically, crypto was exempt from the wash sale rule because it was classified as property, not a security. However, regulations are evolving, and some recent legislation has proposed extending wash sale rules to digital assets. Check current IRS guidance.