Wash Sale

The wash sale rule prevents you from claiming a tax loss while maintaining essentially the same investment position. If you sell stock at a loss and repurchase the same (or substantially identical) stock within the 61-day window (30 days before through 30 days after the sale), the loss is disallowed for tax purposes.

The disallowed loss isn't permanently lost — it's added to the cost basis of the replacement shares. If you sold 100 shares at a $1,000 loss and repurchased within 30 days, the $1,000 loss is added to your new cost basis. You'll eventually benefit from the higher basis when you sell the replacement shares (assuming you don't trigger another wash sale).

The rule applies across accounts. Selling at a loss in your taxable brokerage and buying the same stock in your IRA within 30 days triggers a wash sale. It also applies across spouses for joint filers. The 30-day window includes purchases before the sale, not just after — buying shares and then selling older shares at a loss within 30 days is also a wash sale.

"Substantially identical" is the key phrase, and its definition is fuzzy for certain situations. An S&P 500 ETF from one provider and an S&P 500 ETF from another provider might be considered substantially identical. However, a total market index fund and an S&P 500 fund are likely different enough to avoid the rule. Individual stocks from the same company are definitely substantially identical.

Crypto is currently in a regulatory gray area for wash sales. The IRS has not explicitly applied wash sale rules to cryptocurrency (which it classifies as property, not securities). However, recent legislative proposals aim to extend wash sale rules to crypto. Prudent investors should assume crypto wash sales will eventually be restricted.