Wash Sale: Definition, 30-Day Rule, and Tax Planning Implications

A wash sale occurs when a taxpayer sells a security at a loss and, within 30 days before or after the sale, purchases the same or substantially identical security. Under IRC §1091, the resulting capital loss is disallowed — it cannot be deducted in the current year. The disallowed amount is not permanently lost: it is added to the tax basis of the replacement security, deferring the tax benefit until the replacement is itself sold in a non-wash-sale transaction. The holding period of the disallowed loss position is also tacked onto the replacement security's holding period, which can affect whether a future gain or loss is short-term or long-term under IRC §1091(d).

The 61-Day Window

The wash-sale period spans 30 days before the sale through 30 days after the sale — a 61-day window centered on the transaction date. A loss realized on March 15 is disallowed if the taxpayer purchased substantially identical securities on or after February 13, or if the taxpayer repurchases on or before April 14. Both the pre-sale purchase (the "anticipatory" window) and the post-sale repurchase trigger the rule.

The 30-day count uses calendar days, not trading days. Weekends and holidays are included. Traders who sell on the last trading day of December must wait until February 1 (31 days in January plus the sale date) before repurchasing the same security if they want to recognize the loss in the current year.

What Counts as "Substantially Identical"

The IRS has not issued a definitive bright-line test for substantially identical, but key principles from Revenue Rulings and Tax Court cases establish the following:

  • Same stock: Selling 100 shares of Apple Inc. and repurchasing 100 shares of Apple Inc. is a wash sale.
  • Options and warrants: Acquiring an option or warrant to purchase substantially identical stock triggers the rule — the security does not need to be the underlying stock itself.
  • Bonds: Two bonds from the same issuer are substantially identical if they have the same coupon, maturity, and other material terms. Bonds from the same issuer but with different maturities or coupon rates are generally not substantially identical.
  • Mutual funds and ETFs: Two funds that track the same index from the same provider (e.g., two S&P 500 funds issued by the same fund company) are likely substantially identical. A fund tracking the S&P 500 and a fund tracking the Russell 1000 are generally not, even though there is significant overlap in holdings.
  • Convertible securities: A bond convertible into the issuer's stock and the issuer's stock are substantially identical for wash-sale purposes.

What is NOT substantially identical (and therefore permits immediate repurchase without triggering the rule):

  • A comparable index fund from a different fund company (e.g., Vanguard Total Market vs. Fidelity Total Market)
  • Stock in a different company, even in the same industry
  • A Treasury bond of a different maturity or coupon
  • Cryptocurrency — digital assets are treated as property under IRS Notice 2014-21, not as securities, and are not currently subject to IRC §1091 (discussed below)

Tax Consequences of a Wash Sale

Disallowed loss — basis adjustment: The loss that cannot be recognized in the current year is added to the cost basis of the replacement security. If the taxpayer sold 100 shares at a $2,000 loss and immediately repurchased 100 shares at $18,000, the replacement shares receive a $20,000 adjusted basis — preserving the deferred loss for future recognition.

Holding period tacking: Under IRC §1091(d), the holding period of the replacement security includes the holding period of the sold security. This matters when the final disposition of the replacement security could otherwise be short-term. A taxpayer who held the original shares for 11 months, sold at a loss in a wash-sale, and held the replacement for 2 more months would have a combined 13-month holding period — producing a long-term result on the eventual gain or loss.

Partial wash sales: When only part of a repurchase constitutes a substantially identical position, the disallowance and basis adjustment are applied proportionally.

Cross-Account Wash Sales

The wash-sale rule applies across all accounts held by the taxpayer — it is not limited to the account in which the loss was realized. This includes:

  • All taxable brokerage accounts held by the taxpayer
  • Traditional IRAs and Roth IRAs owned by the taxpayer
  • A spouse's taxable or retirement accounts

The IRA trap: When the replacement purchase occurs inside an IRA (traditional or Roth), the wash-sale disallowance applies, but the basis adjustment does not. Basis cannot be added to an IRA because IRA assets do not have a cost basis tracked at the individual security level for tax purposes. The disallowed loss is permanently lost — not deferred. CPAs must advise clients with automatic dividend reinvestment plans (DRIPs) and periodic IRA contributions to monitor for inadvertent wash sales that will cost the loss forever.

Example: A client sells IBM stock in their taxable brokerage for a $5,000 loss on November 15, and their IRA's automatic reinvestment plan purchases IBM shares on November 20. The $5,000 loss is disallowed, no basis adjustment is available in the IRA, and the loss is gone permanently.

Cryptocurrency and the Wash-Sale Exception

As of the 2026 tax year, cryptocurrency is not subject to the wash-sale rule. The IRS treats digital assets as property rather than securities under Notice 2014-21. A taxpayer can sell Bitcoin at a loss and repurchase it the next day without triggering IRC §1091 disallowance. This creates a tax planning opportunity — clients with unrealized crypto losses can harvest those losses in December and immediately rebuild their position, without waiting the 31-day window required for stock positions.

Legislative risk: Bills to extend the wash-sale rule to digital assets have been introduced in multiple congressional sessions. The One Big Beautiful Budget Act (OBBBA) discussions have included crypto wash-sale provisions, though none have been enacted as of this writing. CPAs should monitor this closely — if enacted, the wash-sale window would effectively eliminate the crypto loss-harvesting advantage for the year of enactment. For current Form 1099-DA reporting context, see Form 1099-DA and 2026 Crypto Broker Reporting Rules.

Planning Strategies

Fund swaps: The most common year-end technique is to sell a depreciated ETF or mutual fund and immediately purchase a comparable fund from a different provider that tracks a similar but not identical index. For example, sell a Vanguard S&P 500 fund and buy a Schwab Total Market fund. The client maintains approximate market exposure while realizing the tax loss. The 61-day window only applies to substantially identical securities — different-but-similar funds sidestep it entirely.

Waiting 31 days: If no suitable swap exists, the taxpayer can sell the position, wait 31 calendar days, and repurchase. The risk is market movement during the out-of-market period. For volatile securities, the tax benefit of the harvested loss may not justify the reinvestment-timing risk.

Lot selection and partial harvesting: For clients holding multiple tax lots of the same security, specific identification (IRC §1012(c)) can isolate high-basis lots for sale without triggering wash-sale disallowance on lower-basis lots, provided the specific lot sold is identified at the time of sale. The replacement purchase only constitutes a wash sale for the lot(s) that were actually sold at a loss.

Monitor dividend reinvestment: Clients with automatic DRIPs must pause reinvestment around any harvest of the same security, particularly in the 30 days following the sale. A $200 DRIP purchase can disallow a $20,000 harvested loss proportionally.

Related Terms

  • Tax Basis — Disallowed wash-sale losses are added to the basis of the replacement security
  • Capital Gains — Wash-sale losses, once preserved in basis, eventually offset capital gains on the replacement
  • Realized vs. Recognized Gain — Wash sales create a gap between realized and recognized loss
  • At-Risk Rules — Another set of loss-limitation rules that interact with basis
  • Net Operating Loss — Disallowed losses cannot contribute to an NOL in the year of disallowance
  • Form 1099-DA — New 2026 crypto reporting form; wash-sale box (1g) is not applicable to digital assets under current law

How CPAs Use This in Practice

CPAs use wash-sale monitoring primarily in year-end tax-loss harvesting engagements. The key workflow: (1) identify unrealized loss positions the client can sell before December 31; (2) confirm whether any recent purchases (within the prior 30 days) or pending automatic purchases (DRIPs, scheduled IRA contributions) will trigger the rule; (3) select appropriate swap securities for immediate reinvestment; (4) confirm no substantially identical positions will be acquired in the client's other accounts, including a spouse's accounts and IRAs; (5) report the disallowed loss correctly on Form 8949 using adjustment code "W" and carry the basis adjustment to the replacement lot. The IRS receives broker-issued Form 1099-B reports that should reflect wash-sale adjustments for same-account transactions, but cross-account wash sales are not reported by brokers — the CPA must track those manually. For the full year-end loss harvesting workflow, see Year-End Tax Strategies for Business Clients.