Wash sale rule
Also known as: Wash-sale rule, 30-day rule
An IRS rule that disallows a tax loss on the sale of a security if the same or a 'substantially identical' security is purchased within 30 days before or after the loss sale. The disallowed loss is added to the cost basis of the replacement security.
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The wash sale rule, codified at IRC § 1091, prevents investors from claiming a tax loss on a securities sale while effectively maintaining the same investment position. The mechanism: if you sell a security at a loss and buy the same or substantially identical security within the 61-day window (30 days before the sale, the day of the sale, and 30 days after), the IRS disallows the loss for the current tax year. The disallowed loss is not lost forever — it is added to the cost basis of the replacement security, which means you get the deduction eventually when you ultimately sell that replacement at a future date.
The 'substantially identical' test is the most debated piece of the rule because the IRS has never published a comprehensive definition. What is clearly substantially identical: the same exact security (same CUSIP), reinvested dividends from the same fund into the same fund, options or convertibles that grant the right to acquire the same security. What is clearly NOT substantially identical: stocks of different companies in the same industry (Coke and Pepsi), funds tracking different indexes (S&P 500 ETF vs total stock market ETF, though this is debated), funds tracking the same index but managed by different providers (Vanguard VTI vs Schwab SCHB tracking similar but distinct indexes). The conservative interpretation: avoid swapping into a fund that tracks the exact same underlying index from a different provider.
The wash sale rule applies across all taxable accounts the investor controls — including a spouse's accounts under joint filing and even IRAs in some interpretations (Revenue Ruling 2008-5 confirmed that wash sales involving an IRA permanently disallow the loss because the IRA-side basis adjustment has no future tax benefit). So you cannot sell a fund at a loss in your taxable brokerage and rebuy it in your traditional IRA on the same day to avoid the wash sale — the IRS treats this as the same investor and the loss is disallowed and lost forever to the IRA basis adjustment.
The rule is most consequential for tax-loss harvesting strategy in taxable brokerage accounts. The standard workaround: after selling Fund A at a loss, buy Fund B that is broadly similar in market exposure but not substantially identical (e.g., sell VTI total stock market, buy SCHB or ITOT for 31+ days, then optionally swap back). Many brokerages automate this via 'tax-loss harvesting' features in robo-advisor accounts. The wash sale also resets the holding period of the replacement security, which matters for long-term vs short-term capital gains classification on the eventual sale.
- Capital gains tax — long-term vs short-term, brackets, basis, and NIIT How US capital gains tax is computed: the holding-period line, the 0/15/20 percent long-term brackets, the 3.8 percent NIIT, basis, and the planning levers.
- Tax-loss harvesting in taxable brokerages: the mechanics How to convert paper losses in a taxable account into a permanent federal tax benefit: the wash sale rule, the $3K offset cap, and the harvest-rebuy mechanics.
- AGI (Adjusted Gross Income) AGI is your total gross income for the tax year minus a specific set of statutory adjustments listed on Schedule 1 of Form 1040. It is the figure on which most tax calculations and eligibility tests downstream actually operate — not your gross income, not your taxable income.
- Capital gains tax rate Federal tax rates that apply to profits from selling assets held in a taxable account. Long-term gains (held >1 year) are taxed at preferential rates (0%, 15%, or 20% depending on income); short-term gains (≤1 year) are taxed as ordinary income at marginal brackets.
- Qualified dividend A dividend that meets specific IRS holding-period and source requirements and qualifies for the preferential long-term capital gains tax rate (0%, 15%, or 20%) instead of the higher ordinary income rate. Reported on Form 1099-DIV box 1b — the subset of total dividends in box 1a that qualified.
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