Wash Sale Rules for Stocks
Overview
The wash sale rule (IRS Section 1091) prevents US stock and securities traders from claiming a tax loss if they repurchase a 'substantially identical' security within 30 days before or after the loss sale (61-day window). The disallowed loss is added to the cost basis of the replacement shares. This rule applies to stocks, bonds, options, and ETFs but does NOT (as of 2024) apply to cryptocurrency.
Key Points
61-day window: 30 days before + sale date + 30 days after, Substantially identical: same stock, same option, same ETF tracking same index, Disallowed loss: added to cost basis of replacement purchase (NOT permanently lost), Applies across accounts: IRA, brokerage, spouse's accounts — all count, Options: buying a call on same stock triggers wash sale, ETFs: two ETFs tracking same index may be substantially identical, Crypto: currently EXEMPT (but legislation proposed to extend it)
Tax Rates
No direct tax rate impact — the rule defers the loss, not eliminates it. The deferred loss increases cost basis, reducing future capital gains. In practice, tax planning around wash sales prevents loss harvesting inefficiency.
Reporting Requirements
Brokers report wash sales on Form 1099-B. Adjust cost basis of replacement shares by the disallowed loss. Report on Schedule D / Form 8949 with wash sale flag (code W). Track across all accounts manually for multi-broker situations.
Tips & Recommendations
Don't let the wash sale rule stop you from tax-loss harvesting — just plan around the 30-day window. You can sell at a loss and buy a correlated (but NOT substantially identical) security to maintain market exposure. For example, sell one S&P 500 ETF and buy a different total market ETF. Be careful with automatic dividend reinvestment — it can trigger an unintended wash sale.
Disclaimer: This guide is for informational purposes only and does not constitute tax advice. Tax laws change frequently. Always consult a qualified tax professional for advice specific to your situation.
Related Tax Guides
Forex 60/40 Rule (Section 1256)
Section 1256 of the US Internal Revenue Code provides a significant tax advantage for certain forex contracts: gains and losses are treated as 60% long-term and 40% short-term capital gains, regardless of actual holding period. This applies to regulated futures contracts (RFC) and foreign currency contracts traded on regulated exchanges. The blended rate is typically lower than short-term rates, benefiting active traders.
Section 988 vs Section 1256
Forex traders in the US must choose between Section 988 (default for spot forex) and Section 1256 (elective for certain contracts). Section 988 treats gains as ordinary income but allows unlimited loss deductions against other income. Section 1256 provides the favorable 60/40 split but limits losses to the $3,000 annual cap against ordinary income. The right choice depends on whether you're profitable or running losses.
Spread Betting Tax (UK)
Spread betting in the UK is classified as gambling by HMRC, making profits completely tax-free — no income tax, no capital gains tax. This is one of the biggest tax advantages available to UK-based traders. However, losses are also not deductible. Spread betting is only available to UK and Ireland residents through FCA-regulated providers. It covers forex, stocks, indices, commodities, and crypto.
Trader vs Investor Tax Status
The IRS distinguishes between investors, active traders, and dealer/day traders — each with dramatically different tax treatment. Investors get capital gains rates but can only deduct $3,000 in losses against ordinary income. Traders who qualify for 'trader tax status' (TTS) can deduct all business expenses, mark-to-market elect (Section 475), and avoid wash sale rules. The distinction hinges on frequency, holding period, and intent.