The wash sale rule is an IRS regulation that prevents investors from claiming a tax deduction on a security sold at a loss if a substantially identical security is purchased within 30 days before or after the sale. Understanding this rule is essential for anyone practicing tax-loss harvesting in US taxable accounts.
How the Wash Sale Rule Works
If you sell a stock at a loss and buy the same stock (or a substantially identical one) within the 61-day window (30 days before through 30 days after the sale), the loss is disallowed for tax purposes. Instead, the disallowed loss is added to the cost basis of the replacement shares, effectively deferring the loss rather than eliminating it.
What Counts as Substantially Identical?
- Buying the same stock or ETF you just sold at a loss.
- Purchasing an option or contract to buy the same security.
- Buying shares through a DRIP within the wash sale window.
- Purchasing the security in a different account (including an IRA).
What generally does NOT trigger a wash sale: buying a different stock in the same sector, buying an ETF that tracks a different index, or buying a competitor company's stock.
Impact on Cost Basis
When a wash sale occurs, the disallowed loss is added to the cost basis of the new shares. For example, if you sell 100 shares at a $500 loss and repurchase within 30 days, the $500 is added to the cost basis of the new shares. When you eventually sell those new shares, the higher cost basis will reduce your gain (or increase your loss) at that time.
How Portfolio Trackers Can Help
Portfolio tracking tools like HCC StockWatcher can help you identify potential wash sale situations by tracking your buy and sell dates across all holdings. This visibility can be useful when planning year-end tax-loss harvesting.
Official IRS Resources
Disclaimer: This article is for informational purposes only and does not constitute tax advice. Wash sale rules have nuances including cross-account rules and the treatment of options. Always consult a qualified tax professional before implementing tax-loss harvesting strategies.
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