Wash Sale Rule

What Is the Wash Sale Rule?

The wash sale rule is a US Internal Revenue Service (IRS) regulation (Section 1091 of the Internal Revenue Code) that prevents taxpayers from claiming a tax deduction on a security sold at a loss if a "substantially identical" security is purchased within 30 days before or after the sale. The rule exists to prevent investors from selling solely to claim a tax loss and then immediately repurchasing the same position.

The 30-day window applies in both directions: you cannot buy the same security 30 days before the sale (in anticipation) or 30 days after. This creates a 61-day total window (30 + 1 + 30) within which the purchase of a substantially identical security triggers the rule.

What "Substantially Identical" Means

The IRS has not provided a precise definition of "substantially identical," which creates some ambiguity. However, the following are generally understood. Buying the same stock or bond is clearly substantially identical. Buying a mutual fund or ETF tracking the same index is likely substantially identical. Buying a mutual fund or ETF tracking a different but similar index (S&P 500 vs. total stock market) is generally considered not substantially identical, though this is a gray area.

Stocks of different companies in the same industry are not substantially identical because they are distinct securities with different characteristics. Options on the same stock may be considered substantially identical in some circumstances.

Impact on Tax-Loss Harvesting

The wash sale rule is the primary constraint on tax-loss harvesting strategies. Investors must navigate the rule carefully to realize tax losses while maintaining their desired portfolio exposure.

Replacement securities must be similar enough to maintain the portfolio's risk and return profile but different enough to avoid the substantially identical designation. The most common approach uses different funds tracking different (but related) indexes.

The wash sale rule applies across all accounts owned by the taxpayer, including IRAs and other retirement accounts. A loss realized in a taxable account can be disallowed if the same security is purchased in an IRA within the 30-day window. This cross-account application catches many investors by surprise. Automated dividend reinvestment in any account holding the same security can also inadvertently trigger wash sales.