The Wash Sale Rule: Six Things You Need to Know (2024)

Be aware of the wash sale rule enforced by the IRS. The wash sale rule is important for investors reassessing their market positions and looking to sell and repurchase declining stocks to offset losses. Disallowed losses are a potential pitfall of violating the wash sale rule, so here are six things you need to know.

1. What the wash sale rule is

The wash sale rule states that if you buy or acquire a substantially identical stock within 30 days before or after you sold the declining stock at a loss, you generally cannot deduct the loss.

Essentially, a wash sale occurs when you sell a security at a loss and then purchase the same security again in a short period.

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Note: Losses can offset same-year gains that can ultimately reduce capital gains taxes. Additionally, remaining losses can be deducted from ordinary income (up to $3,000) or carried over to the following tax year. As a result, many people opt to sell securities at a loss to reduce taxable gains, a technique commonly known as tax loss harvesting.

But the IRS doesn’t like investors to use "manufactured" losses to claim tax breaks. If you sell a stock at a loss and quickly buy it back or keep investing in the stock after buying it back, the IRS generally won’t allow you to write off the loss on your federal tax return.

Let's consider an example. Suppose you bought 50 shares of a fictional JustaTissueBox stock for $100 per share, and its value dropped to $80 per share.

  • You decided to sell all your shares at a loss of $1,000.
  • However, two weeks later, the stock's value dropped further to $50 per share, and you bought back 50 shares for $2,500.
  • Unfortunately, you cannot claim the $1,000 capital loss on your tax return for that year because the second purchase was a wash sale.

2. What happens when you have a wash sale

If you experience a wash sale, the capital loss that is disallowed by the IRS is included in the cost basis of the replacement stock. This means that if you sell the replacement stock later on, any taxable gain will be smaller, and any deductible loss will be larger. Additionally, the holding period of the new stock now includes the holding period of the original stock. As a result, when you sell the new stock, the gain may be taxed at lower long-term capital gains tax rates.

3. How to avoid the wash sale rule

If you want to avoid the IRS disallowing your loss due to the wash sale rule, you have a few options.

  • One choice is to hold off on repurchasing the same or very similar stock that you sold. Keep in mind that the wash sale rule goes into effect 30 days before and after the sale, so you have a 61-day window to avoid buying the same stock.
  • Alternatively, if waiting 61 days isn't feasible, you can purchase a security that is not substantially identical to the one you recently sold.

The challenge with the second option is that the term “substantially identical” hasn’t been defined by Congress or the IRS. So, what’s considered substantially identical for the wash sale rule will largely depend on the facts and circ*mstances of your transaction.

4. How the wash sale rule works: Examples

If you're trying to figure out if the IRS might disallow some of your capital losses, IRS Publication 550 contains some wash sale rule examples that could help.

  • Generally, stocks of one corporation are not considered substantially identical to those of another corporation.
  • However, in certain situations, like a reorganization, those stocks could be considered substantially identical.

According to the IRS, a corporation's bonds and preferred stock are usually not considered too similar to its common stock. But, if the preferred stock can be turned into common stock, has the same voting rights, or is limited in the same way in terms of dividends, then it would be considered substantially identical.

What about your spouse’s stock purchases? The IRS says that a wash sale exists if your spouse or a corporation you control purchases substantially identical stock within the wash sale rule 61-day period.

5. What the wash sale rule applies to

The wash sale rule applies to most securities, including stocks and options, bonds, mutual funds, and exchange-traded funds (EFTs). But the wash sale rule doesn't currently apply to cryptocurrency. This is partly because the IRS classifies crypto as property, not as a security. So, if you are selling crypto for a loss and immediately rebuying it you can claim the capital loss.

So, crypto investors essentially have a tax loophole known as the "wash sale rule crypto loophole," which allows them to claim tax benefits for losses that may not be genuine. However, that doesn’t apply to investors in other securities, who are subject to the wash sale rule.

6. How to report a wash sale on your return

If you need to report losses from wash sales, you can use IRS Form 8949 and Schedule D. Form 8949 will help you compare the amounts reported on Forms 1099B or 1099S, while Schedule D will show the overall gain or loss from the transactions reported on Form 8949.

If you are married and are filing jointly you must complete as many copies of Form 8949 as needed to report all the transactions for you and your spouse. The totals from all Forms 8949 should be on Schedule D.

Wash sale rule: Bottom line

Before selling and repurchasing stocks that decreased in value, you should seek trusted advice experts who are knowledgeable about the tax implications involved.

Also, review IRS guidelines, in Publication 550, to understand which losses might be disallowed due to the wash sale rule.

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The Wash Sale Rule: Six Things You Need to Know (2024)

FAQs

What you need to know about wash sales? ›

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

What are the rules for wash sale ordering? ›

A wash sale occurs when an investor sells a security at a loss and then purchases the same or a substantially similar security within 30 days, before or after the transaction. This rule is designed to prevent investors from claiming capital losses as tax deductions if they re-enter a similar position too quickly.

Can I buy back into the same stock after 30 days to avoid a wash sale? ›

If you have a wash sale, however, you cannot claim the write-off until you finally sell the asset and avoid repurchasing it for at least 30 days. After that period, you can re-buy the asset without triggering the wash-sale rules.

How do you count 30 days for a wash sale? ›

A Wash Sale occurs if you sell securities at a loss and buy substantially identical replacement shares within 30 days before or after the sale. The Wash Sale Period is 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).

How much stock can you sell without paying taxes? ›

Capital Gains Tax
Long-Term Capital Gains Tax RateSingle Filers (Taxable Income)Head of Household
0%Up to $44,625Up to $59,750
15%$44,626-$492,300$59,751-$523,050
20%Over $492,300Over $523,050

How much stock loss can you write off? ›

Your claimed capital losses will come off your taxable income, reducing your tax bill. Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately).

What triggers a wash sale with options? ›

The IRS wash sale rules apply when you reestablish a substantially identical security position 30 days before or 30 days after closing a security position at a loss. The IRS rule specifies that the only way to reestablish and mark a loss against your overall taxable gain is after 30 days from your last closing order.

Can you sell a stock for a gain and buy back immediately? ›

It is always possible to sell a stock for profit purposes, as the Income Tax Department has you paying taxes on the profit you make. This is, as mentioned earlier, a capital gains tax. You can buy the same stock back at any time, and this has no bearing on the sale you have made for profit.

Can I sell a stock and buy it back the same day? ›

Absolutely, you can buy and sell stocks within the same trading day. This dynamic strategy, known as day trading, is an integral part of the financial landscape and serves as the lifeblood for many traders.

Why are capital losses limited to $3,000? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Can you undo a wash sale? ›

For positions where you still own some shares, you can recover the disallowed loss by selling all the shares that you still own, and not purchasing any shares of the same stock for at least 30 days after the sale.

What is the penalty for a wash sale? ›

If you trigger a wash sale, the amount of loss that is not deductible will be added to the cost of the newly purchased, substantially identical stock. This means that if you later sell the newly purchased stock at a gain, you will pay less in taxes.

Are wash sales reported to the IRS? ›

6. How to report a wash sale on your return. If you need to report losses from wash sales, you can use IRS Form 8949 and Schedule D. Form 8949 will help you compare the amounts reported on Forms 1099B or 1099S, while Schedule D will show the overall gain or loss from the transactions reported on Form 8949.

Are wash sale losses gone forever? ›

Are Wash Sales Gone Forever? Losses from wash sales may not be gone forever. The initial loss is added to the cost basis of the new investment. When that investment is eventually sold or traded, gains or losses will be determined from the modified cost basis.

What is an example of a wash sale basis adjustment? ›

Practical Example: Wash Sale

Since the transaction occurred within the 30-day wash sale period, the $300 loss is a wash sale and would be disallowed by the IRS. The adjusted basis for the replacement shares is $3,600, which is the addition of the $3,300 ($33 x 100) and the $300 loss that was disallowed.

Is the wash sale rule 30 or 60 days? ›

The wash sale rule states that if you buy or acquire a substantially identical stock within 30 days before or after you sold the declining stock at a loss, you generally cannot deduct the loss.

How many days to avoid a wash sale? ›

To avoid a wash sale, the investor can wait more than 30 days from the sale to purchase an identical or substantially identical investment or invest in exchange-traded or mutual funds with similar investments to the one sold.

Why would someone want a wash sale? ›

The wash sale rules are designed to prevent people from selling investments and then buying the same stock back. Investors do this for the sole purpose of: Creating a deductible loss. Using the loss to offset other shares sold for a gain.

What are the consequences of wash sale? ›

Consequences of running afoul of the wash sale rule can be significant: The loss from the sale of the original shares is disallowed. The amount of the disallowed loss is added to the basis of the newly acquired shares, and realized only when the newly acquired position is sold.

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