Wash Sale Rule Guide

What the Wash Sale Rule Is

The wash sale rule is an anti-abuse provision in IRC §1091. It stops you from claiming a tax loss on a security while staying invested in essentially the same position. If you sell stock or securities at a loss and acquire substantially identical stock or securities within a short window around the sale, the loss is disallowed for that year. The economic logic is simple: if you never really left the position, Congress does not let you bank the loss yet.

The rule matters most for tax-loss harvesting, the common practice of selling losers near year-end to offset gains or up to $3,000 of ordinary income. Harvesting only works if the loss is actually deductible, and the wash sale rule is the main thing that can take it away. Critically, the loss is not destroyed, only deferred (except in the IRA case below), so a wash sale is usually a timing problem rather than a permanent loss of the deduction.

Where It Comes From

Section 1091 disallows "any loss" from a sale of stock or securities where, within a period beginning 30 days before and ending 30 days after the sale, the taxpayer has acquired (or entered into a contract or option to acquire) substantially identical stock or securities. The matching basis and holding-period rules are in §1091(d). The IRS explains the mechanics in Publication 550. This guide walks through each part and then shows how it connects to your capital loss carryover.

The 61-Day Window

The wash sale period is often called the 30-day rule, but it is really a 61-day window. It includes the 30 calendar days before the sale, the day of the sale itself, and the 30 calendar days after. A purchase of substantially identical securities at any point in that span disallows the loss.

The most overlooked half is the 30 days before. Investors who plan to harvest a loss often remember not to rebuy for 31 days afterward, but forget that a recent purchase, an automatic dividend reinvestment, or a payroll-plan purchase in the prior month can disallow the very loss they are trying to take. To be safe, the position should be clean of any substantially identical purchases for the full 61 days, and you must wait at least 31 days after the sale before buying back.

The window counts calendar days, not trading days, and there is no exception for weekends or holidays. Because the count is exact, a repurchase on day 30 still triggers the rule, while a repurchase on day 31 does not.

Substantially Identical Securities

The rule only bites if the security you buy is substantially identical to the one you sold. The phrase is not defined in the statute, and the IRS judges it on the facts, but some patterns are settled.

• The same security is always substantially identical. Selling and rebuying the same company's common stock, or the same mutual fund or ETF, is the clearest wash sale.
• Different companies are not. Selling one company's stock and buying a competitor's is not a wash sale, even in the same industry.
• Index funds tracking the same index from the same provider are generally treated as substantially identical; two funds tracking different indexes usually are not, which is the basis of most harvesting swaps.
• Preferred stock or bonds versus common stock of the same company can be substantially identical if they are convertible or otherwise interchangeable, but ordinarily are treated as different securities.
• Options and contracts count. Acquiring a call option or a contract to buy substantially identical stock within the window triggers the rule just like buying the shares.

The practical takeaway for harvesting is to replace a sold fund with one that is clearly not substantially identical - a different issuer tracking a different index in the same asset class - so you keep market exposure without disallowing the loss. After 31 days you can switch back to the original if you wish.

How the Disallowed Loss Is Calculated

When a wash sale applies, you do not deduct the loss in the year of sale. The amount disallowed is the loss attributable to the shares that were replaced. If you replace only some of the shares you sold, only the loss on the matched shares is disallowed; the rest is deductible.

• Full replacement. Sell 100 shares at a $2,000 loss and buy 100 substantially identical shares within the window - the entire $2,000 loss is disallowed.
• Partial replacement. Sell 100 shares at a $2,000 loss but buy back only 40 - 40 percent of the loss ($800) is disallowed; the other $1,200 is deductible.
• More shares bought than sold. If you buy more replacement shares than you sold, the disallowed loss attaches to an equal number of the new shares; the extra shares simply have their own cost basis.

The disallowed amount is what you carry into the basis adjustment below. It also means a wash sale reduces the net loss available for your $3,000 deduction and your carryover, which is why harvesting plans have to account for it before counting on a deduction.

The Basis and Holding-Period Adjustment

This is the part that makes a wash sale usually a deferral rather than a true loss. Under §1091(d), the disallowed loss is added to the cost basis of the replacement shares, and under the holding-period rules the time you held the original shares is added to the holding period of the replacement shares.

Basis Step-Up

Suppose you buy 100 shares for $5,000, sell them for $3,000 (a $2,000 loss), and rebuy 100 substantially identical shares for $3,100 within the window. The $2,000 loss is disallowed, so your basis in the new shares is $3,100 plus $2,000, or $5,100. When you later sell those shares in a clean transaction, the higher basis gives you a bigger loss or a smaller gain, recovering the $2,000. The loss was deferred, not lost.

Holding Period Tacks

The holding period of the shares you sold is added to the replacement shares. So if you had held the original shares for 11 months, the replacement shares are treated as already held 11 months. This can let a later sale qualify as long-term sooner than the actual purchase date would suggest, which affects whether a future gain or loss is short-term or long-term.

IRAs, Spouses, and Related Accounts

The wash sale rule reaches beyond the single account where you sold. A purchase of substantially identical securities counts even if it happens in a different account, in a spouse's account, or by an entity you control.

The IRA Trap (Permanent Loss)

The most damaging version is selling a security at a loss in your taxable account and buying the same security in your traditional IRA or Roth IRA within the window. Revenue Ruling 2008-5 holds that the loss is disallowed and, crucially, your basis in the IRA is not increased. Because an IRA has no outside basis to step up, the deferred loss has nowhere to go - it is permanently forfeited. The same result applies to a purchase in a spouse's IRA. Unlike an ordinary wash sale, you never get this loss back.

Spouses and Controlled Entities

The IRS treats a married couple as one economic unit for this purpose. If you sell at a loss and your spouse buys substantially identical shares within the window, the rule applies. A purchase by a corporation or partnership you control can also trigger it. Brokers cannot see across these separate accounts, so the burden is on you to identify the wash sale and adjust your return.

Automatic Dividend Reinvestment

A dividend reinvestment plan buys additional shares automatically. If a reinvestment lands within the 61-day window for a security you sold at a loss, even a small one triggers a partial wash sale on a matched number of shares. Turning off reinvestment in a position you plan to harvest is a simple way to avoid the surprise.

Cryptocurrency and What Is Not Covered

IRC §1091 applies to "stock or securities." That wording controls what falls outside the rule.

• Cryptocurrency. The IRS treats cryptocurrency as property, not a security, so as of 2026 the wash sale rule does not apply to it. Selling a coin at a loss and rebuying it immediately generally preserves the loss. Congress has repeatedly proposed extending wash sale rules to digital assets, and the One Big Beautiful Bill Act did not make that change, so it remains current law. Watch for future legislation, and note that crypto held through a security, such as a stock or an ETF, can be a different story.
• Commodities and most physical assets. Direct commodity positions outside the securities definition are generally not covered, though related securities and contracts can be.
• Gains. The rule disallows losses only. There is no wash sale on a gain; selling at a gain and rebuying is never restricted.
• Section 475 traders. A trader who has made a valid mark-to-market election under §475(f) reports ordinary gains and losses and is not subject to wash sale adjustments on securities.

Because the crypto position is widely misunderstood and the law could change, anyone harvesting crypto losses should document the rules in effect for the year and watch for new legislation each session.

Reporting a Wash Sale on Form 8949

Wash sales are reported on Form 8949, which feeds Schedule D. You report the sale normally, then flag the wash sale and add back the disallowed portion.

• Column (f) - code W. Enter code W to identify the transaction as a wash sale.
• Column (g) - adjustment. Enter the disallowed loss as a positive number. This reduces the loss in column (h), so only the deductible part flows to Schedule D.
• Form 1099-B. Your broker reports wash sales within that one account and may show the adjustment for you, but brokers do not track wash sales across different accounts, across brokers, or between spouses.

The cross-account blind spot is where most reporting errors happen. If you sold at a loss in one brokerage and bought the replacement in another, in an IRA, or in your spouse's account, no single 1099-B will catch it, and you must make the code W adjustment yourself. Keeping the disallowed amount straight is also what keeps your basis in the replacement shares correct for the future recovery.

Wash Sales, Capital Loss Carryover, and Harvesting

The wash sale rule sits upstream of the capital loss rules. Only losses that survive §1091 enter the Schedule D netting that decides your $3,000 deduction and your carryover under §1211 and §1212.

The sequence is: first remove any wash-sale losses (deferring them into basis), then net short-term and long-term gains and losses, then apply the $3,000 ($1,500 MFS) annual limit against ordinary income, and finally carry the rest forward indefinitely, keeping its short-term or long-term character. A wash sale that disallows a loss this year shrinks both the current deduction and the carryover, then quietly restores the benefit later through the higher basis on the replacement shares.

For tax-loss harvesting to work, the loss has to be real for tax purposes, which means avoiding a wash sale entirely or accepting the deferral. Once your figures are clean, the Capital Loss Carryover Calculator shows how much you deduct now and how much, split by character, carries forward. For the rules on the deduction limit and indefinite carryover, the calculator's methodology walks through §1211 and §1212 step by step. Once losses are netted and a gain remains, the Qualified Dividends and Capital Gains Worksheet Guide shows the 0/15/20 percent rate that gain is taxed at.

Practitioner Insight (LMN Tax Inc.)

Real-World Scenarios

When the General Rules Do Not Apply

• Cryptocurrency (2026). Crypto is property, not a security, so §1091 does not apply. This could change if Congress acts; check the law for the year.
• Section 475 mark-to-market traders. A valid §475(f) election produces ordinary gains and losses and removes wash sale adjustments on securities.
• Dealers in securities. A loss sustained in the ordinary course of a dealer's business is excepted from §1091.
• Gains. The rule disallows losses only; there is never a wash sale on a position sold at a gain.
• Different, non-identical securities. Swapping into a security that is not substantially identical avoids the rule even within the window.
• State conformity. Most states follow the federal treatment, but confirm your state, especially if it computes capital gains differently.
• Cost-basis method interactions. Specific-identification versus average-cost choices can change which lots are matched in a partial wash sale.

Frequently Asked Questions

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