Wash Sale Rule
Definition
An IRS regulation that disallows claiming a tax loss on a security if you buy a substantially identical security within 30 days before or after the sale.
The wash sale rule exists to prevent investors from selling a security at a loss purely for tax benefits and immediately repurchasing it. Under IRS rules, if you sell a stock or other security at a loss and buy the same or a "substantially identical" security within a 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 gets added to the cost basis of the replacement shares. This means you'll eventually recognize the loss when you sell the replacement shares, assuming you don't trigger another wash sale.
Wash sales apply to stocks, bonds, mutual funds, ETFs, and options. They apply across all your accounts, including IRAs. Notably, the wash sale rule has historically not applied to cryptocurrency in the U.S., though this may change with evolving regulations.
For active traders, tracking wash sales manually is extremely difficult. Each lot must be checked against purchases across all accounts within the 61-day window. This is where automated cost basis tracking becomes essential — software can flag wash sales in real time and adjust your cost basis accordingly.
Common mistakes include buying in a retirement account within the wash sale window, reinvesting dividends that trigger a wash sale, and not realizing that options on the same underlying security can trigger the rule.
Where this appears in Clarity
Clarity automatically tracks and calculates these concepts across your connected accounts.
Related Terms
Frequently Asked Questions
Does the wash sale rule apply to crypto?
As of 2025, the wash sale rule does not explicitly apply to cryptocurrency under current IRS guidance since crypto is classified as property, not a security. However, proposed legislation may extend wash sale rules to digital assets in the future.
What happens to a disallowed wash sale loss?
The disallowed loss is added to the cost basis of the replacement shares. When you eventually sell those replacement shares, the higher cost basis will result in a smaller gain or larger loss, effectively deferring rather than eliminating the tax benefit.
Can a wash sale occur across different accounts?
Yes. The IRS applies the wash sale rule across all your accounts, including taxable brokerage accounts, IRAs, and even your spouse's accounts. Buying a substantially identical security in any account within the 61-day window triggers the rule.