Wash Sale Rule

Section 1091 looks at a 61-day window: the 30 days before you sell at a loss, the sale date, and the 30 days after. If you acquire substantially identical stock or securities anywhere in that window, the loss is not deductible. Acquiring includes buying outright, receiving the shares in a fully taxable trade, and entering into a contract or option to buy them. IRS Publication 550 adds purchases made for your IRA or Roth IRA, and purchases by your spouse or by a corporation you control.

A wash sale usually postpones the loss rather than erasing it. The disallowed amount is added to the cost basis of the replacement shares, and the holding period of the shares you sold carries over to them, which can make a later sale long-term sooner. When you eventually sell the replacement without another wash sale, the old loss shows up as a smaller gain or a bigger loss.

If you buy back fewer shares than you sold, only part of the loss is disallowed: purchases are matched share for share with the shares sold, in the order you bought them, as the example below shows.

The statute does not define the phrase, and Publication 550 says to weigh all the facts and circumstances of your case. A few markers are settled. Stock of one company is ordinarily not substantially identical to stock of another company, although predecessor and successor stock in a reorganization can be. A company’s bonds or preferred stock are ordinarily not substantially identical to its common stock, unless they are convertible and trade in step with it. Selling common stock at a loss and buying warrants on the same company’s common stock does trigger the rule.

Funds are the gray area. Publication 550 offers no specific test for mutual funds or ETFs, so treating two funds that track the same index as different investments is a judgment call you would have to defend. Swapping into a fund built on a different benchmark, for example from one broad US index fund to another that follows a different index, is the more conservative route, because the holdings and returns genuinely differ.

The rule applies to you as a taxpayer, not to a single account, so purchases anywhere in the household count. These are the cases that most often turn a planned tax-loss harvest into a deferred or lost deduction, usually because the purchase happened somewhere the seller was not watching. Check them before you sell and again before any purchase over the following month, remembering that the window counts calendar days and runs straight across year-end.

Brokers report only part of the picture. Box 1g of Form 1099-B generally shows a disallowed wash sale loss when the shares sold were covered securities and the replacement had the same CUSIP number and was bought in the same account. Brokers need not report other wash sales, so purchases in another brokerage account, in an IRA or by your spouse often go unflagged, yet the IRS instructions are plain that the loss is still not deductible.

You report a wash sale on Form 8949, in Part I or Part II depending on how long you held the shares, with code W in column (f) and the disallowed amount entered as a positive adjustment in column (g). Keep your own record of the basis added to the replacement shares, especially when the broker never saw the wash sale.

Some transactions sit outside the rule. It does not apply to redemptions of floating-NAV money market fund shares, to commodity futures contracts or foreign currencies, or to a dealer’s losses in the ordinary course of business.

There are three clean approaches. The first is to wait: sell, then stay out of the security for 31 days, accepting the market risk while you are out. The second is to swap: reinvest the proceeds right away in something that is not substantially identical, such as a different company in the same industry or a fund tracking a different index, and move back after 31 days if you prefer the original. The third is to double up in advance: buy the extra shares first, wait more than 30 days, then sell the original lot at a loss, making no other purchase in the 30 days after the sale.

Whichever route you take, pause automatic investments into the security and check every account in the household. A loss that survives the test is still limited to $3,000 a year against ordinary income, with the rest becoming a capital loss carryover.