Wash Sale Definition | U.S. News

A wash sale occurs when an investor sells a stock or other security for a loss and then they, their spouse or a company controlled by them buys it back within 30 days of the sale date.

The wash sale rule prevents investors from claiming the tax benefits from stock losses if they have also purchased the same stock any time during a window ranging from 30 days before the sale date to 30 days after the sale date. The International Revenue Service does not consider the loss generated from a wash sale to be a realized loss for tax purposes. Brokers will typically report “wash sale loss disallowed” on a taxpayer’s 1099-B form.

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The U.S. Securities and Exchange Commission says a wash sale occurs when an investor sells or trades securities at a loss and also takes one of the following actions within a window ranging from 30 days before the sale to 30 days after it:

  • Buys substantially identical securities. 
  • Acquires substantially identical securities in a taxable trade.
  • Acquires options or other contracts to buy substantially identical securities. 

If a stock sale is classified as a wash sale, the IRS does not allow taxpayers to deduct the losses associated with the sale. Different common share classes of the same company’s stock are typically considered “substantially identical,” but bonds or preferred stock in a company is not typically considered substantially identical to common stock in the same company.

The IRS provides several tax advantages for investors who sell stocks or other securities at a loss. Investors may be able to deduct some or all of those losses to offset capital gains and reduce their overall tax burden. The purpose of the wash sale rule is to prevent investors from selling a stock to gain the tax advantages and then immediately buying back into the position to essentially maintain their original investment. Without the wash sale rule, investors could gain tax benefits any time a long-term investment is down without the opportunity costs associated with selling it.

One popular year-end tax strategy that investors often use is tax-loss selling, or tax-loss harvesting. The end of a calendar year is a great time for investors to cut ties with underperforming stocks and investments and rebalance their portfolios for the new year. By selling their losing positions before the end of December, investors can lower their tax burdens for the year. Losses on losing positions can offset capital gains on winning positions that have been sold throughout the year.

If your net capital losses exceed net capital gains, you can even use the surplus losses to offset up to $3,000 per year in ordinary income for tax purposes. In addition, any net capital losses exceeding $3,000 can be carried over and potentially be used to offset capital gains or ordinary income in future tax years. For example, a taxpayer can use one large $10,000 loss in a single stock to offset $5,000 in capital gains from the rest of the taxpayer’s portfolio, reduce the taxpayer’s ordinary income by $3,000 for the current tax year and carry over an additional $2,000 in offsets to the following tax year.

Wash sales can completely undermine the objective of tax-loss selling. A wash sale is not considered a true sale of a stock or other security for tax purposes, so those losses cannot legally be used to offset capital gains or ordinary income. Investors who are not familiar with wash sale rules can also unwittingly buy back shares of stock 28 or 29 days after selling it as part of a trading strategy or because an earnings report or other news development changed their outlook for the stock. If they don’t realize that the original sale is then considered a wash sale, they could make mistakes on their tax returns that potentially subject them to an IRS audit, fines, fees or additional tax filing inconveniences. Understanding what constitutes a wash sale is absolutely vital for anyone pursuing a day trading strategy.

Wash sales must be reported on IRS Form 8949. If you erroneously offset capital gains using losses from a wash sale, you could be on the hook for unexpected tax payments. In addition, underpaid taxes also accrue interest at a rate that the IRS sets. For the first quarter of 2022, the IRS underpayment interest rate is the federal short-term rate plus 3%. The IRS may also issue an accuracy-related penalty of 20% for tax underpayments “due to negligence or disregard of rules or regulations or substantial understatement of tax.”

If you’re married and filing jointly and you sell a stock for a loss but your spouse buys the same stock within the wash sale window, your sale is classified as a wash sale. If you sell a stock in a taxable account and re-buy it during the wash sale window in a tax-deferred retirement account, such as a 401(k) or an individual retirement account, your sale is classified as a wash sale. If you sell a stock at the end of one tax year and buy it back within 30 days in the following tax year, it is still considered a wash sale. Finally, if you buy a stock within 30 days before you sell your original position in the stock, that sale is still considered a wash sale even though the purchase took place before the sale.

If you want to take advantage of tax-loss selling and still repurchase your original investment for the long term, the easiest way to avoid your sale being classified as a wash sale is to wait at least 30 days after the sale before buying the stock again.

There are other strategies to avoid triggering a wash sale while maintaining exposure to a particular stock or investing theme. Preferred shares of stock are not considered “substantially identical” to common shares of stock, so switching from common to preferred shares of the same company is permissible. In addition, selling shares of one company and buying shares of a different company that is in the same business, such as selling one bank stock and immediately buying shares of another, is not considered a wash sale. Selling one exchange-traded fund that tracks a particular index, such as the S&P 500 index, and buying a different ETF that tracks the same index is also not considered a wash sale because the different funds may have different managers, expense ratios, tracking methodologies and other characteristics.

If you trigger a wash sale, you do not get to deduct the loss of the sale on your current-year tax return, but it does not mean you permanently lose your tax benefit. Instead, the loss is simply added to the cost basis of the stock when you repurchased your position. For example, if you buy a stock for $1,000 and then sell it for $800, you incur a $200 loss. If you re-purchase that stock within 30 days for $600, that $200 loss is not deductible under wash sale rules. However, the cost basis of your repurchase is bumped up from $600 to $800. If you eventually sell the stock for $1,000, your taxable capital gain on that trade is only $200.


Yes. The wash sale rule applies to individuals or married couples filing jointly, not to each individual account.

Yes. The wash sale rule applies to most stocks, ETFs, mutual funds, options and bonds.

No. The IRS currently classifies cryptocurrency as property, not a security, making it exempt from the wash sale rule.