Wash Sale Rule

The wash sale rule is an IRS regulation that prevents investors from claiming a tax deduction for a security sold at a loss if they purchase a "substantially identical" security within 30 days before or after the sale.

The 61-Day Window:

     30 days before | Sale Date | 30 days after
        ←────────────●────────────→
        Wash sale window = 61 days total

What Triggers a Wash Sale:

• Buying the same stock within the window
• Buying call options on the same stock
• Buying substantially identical mutual funds
• Acquiring through dividend reinvestment
• Spouse buying the same security
• Your IRA buying the same security

Consequences of Violating:

1. Loss deduction is DISALLOWED (not eliminated)
2. Disallowed loss is added to new purchase cost basis
3. Holding period of original shares transfers
4. You'll eventually get the benefit (when you sell the new shares)

Example:

Date	Action	Price	Result
Jan 1	Buy 100 shares XYZ	$50	Cost basis: $5,000
Mar 1	Sell 100 shares	$40	Loss: $1,000
Mar 15	Buy 100 shares XYZ	$38	Wash sale!
Result	Loss disallowed		New cost basis: $4,800 ($3,800 + $1,000)

What's NOT Substantially Identical:

• Different companies in same industry (Coca-Cola vs Pepsi)
• Different index funds tracking same index (Vanguard vs Fidelity S&P 500)
• Stock vs bonds of same company
• Preferred vs common stock (usually)

Strategies to Avoid Wash Sales:

1. Wait 31 days before repurchasing
2. Buy similar but not identical - Different fund company, different index
3. Double up method - Buy now, wait 31 days, then sell original
4. Sell in December - Repurchase in February (different tax year)

Common Mistakes:

• Forgetting about dividend reinvestment (DRIP)
• Not checking spouse's accounts
• Buying in IRA while selling in taxable
• Automatic rebalancing triggering wash sales

Record Keeping:

• Brokers report wash sales on Form 1099-B
• Track across all accounts manually
• Document all "substantially identical" determinations