Wash Sale

A wash sale occurs when you sell a security at a loss and then repurchase the same or a "substantially identical" security within a 61-day window (30 days before or after the sale). The IRS wash sale rule (Section 1091) prevents taxpayers from claiming an artificial tax loss while essentially maintaining the same investment position — it closes the loophole of selling to harvest a loss and immediately buying back.

The rule doesn't eliminate the loss — it defers it by adding the disallowed loss to the cost basis of the replacement shares. If you buy Stock A at $100, sell at $80 (a $20 loss), and repurchase within 30 days at $82, the wash sale rule disallows the $20 loss deduction. Instead, your new cost basis becomes $102 ($82 purchase price + $20 disallowed loss). When you eventually sell the replacement shares, the deferred loss reduces your future gain or increases your future loss.

The "substantially identical" rule extends beyond the exact same stock. Selling Apple stock and buying an Apple call option would trigger a wash sale. Selling an S&P 500 index fund from Vanguard and buying an S&P 500 fund from Fidelity would likely be considered substantially identical. However, selling an S&P 500 fund and buying a total stock market fund is generally considered different enough to avoid the rule, despite high correlation.

The wash sale rule applies across all your accounts — selling at a loss in a taxable account and buying in your IRA within 30 days triggers the rule. This is a common and costly mistake. For active tax-loss harvesters, tracking the 61-day window across all accounts is essential. Many robo-advisors and tax-loss harvesting services automatically manage wash sale compliance, which is one of their most valuable features.