The wash sale rule is one of the most misunderstood, most violated, and most expensive rules in trader taxation. It operates silently — disallowing loss deductions without any obvious warning — and by the time most traders discover it, they've already lost thousands in deductions they can never recover.
What Is the Wash Sale Rule?
The wash sale rule (IRC §1091) disallows a loss deduction when you sell a security at a loss and then purchase the same or "substantially identical" security within the 30-day window before or after the sale.
The 30-day window is a 61-day total window: 30 days before the sale, the day of the sale, and 30 days after.
You buy 100 shares of SPY on January 1. SPY drops and you sell at a $2,000 loss on February 15. On March 1, you buy SPY again. The February 15 loss is disallowed — it's a wash sale. You cannot deduct that $2,000 loss.
What Triggers the Wash Sale Rule?
- Selling at a loss and rebuying the same stock within 30 days
- Selling at a loss and buying an option on the same stock within 30 days
- Selling at a loss and having a spouse's account buy the same stock
- Selling at a loss in a taxable account and buying the same security in an IRA
- Selling at a loss in a taxable account and buying a substantially identical ETF
The Cross-Account Trap
This is where active traders get destroyed. Wash sale rules apply across ALL your accounts — including IRAs, 401(k)s, and your spouse's accounts.
Example: You sell QQQ at a loss in your regular brokerage account. Two weeks later, you buy QQQ in your Roth IRA. That's a wash sale — but the loss is permanently disallowed because it occurred in a retirement account that doesn't recognize gains and losses the same way.
When a wash sale occurs because of a purchase in an IRA, the disallowed loss is permanent — it doesn't get added to your cost basis and can never be recovered. This is the most expensive wash sale scenario for active traders.
The "Substantially Identical" Problem
You can't just sell one ETF and buy a "similar" one to avoid wash sales. The IRS hasn't fully defined "substantially identical" for ETFs, but selling SPY and buying VOO (both S&P 500 ETFs) is risky — they track the same index. However, selling SPY and buying VTI (total market) is generally considered safe.
How the Wash Sale Cost Basis Adjustment Works
When a wash sale occurs, the disallowed loss isn't gone forever in most cases — it gets added to the cost basis of the repurchased security. This means you'll eventually be able to use the loss when you sell the replacement security — as long as you don't trigger another wash sale.
Example: Buy stock at $100. Sell at $70 (loss = $30). Repurchase within 30 days at $72. Your new cost basis is $72 + $30 = $102. When you later sell at $80: your loss is $102 - $80 = $22 (not a gain).
Year-End Wash Sales — The Most Dangerous Scenario
The most damaging wash sales happen in December. If you sell at a loss in December and repurchase the same security in January (within 30 days), the loss is disallowed for the current year — but the cost basis adjustment won't help you until you eventually sell again. In practice, many December wash sales effectively defer losses by an entire year.
Who Is Exempt from Wash Sale Rules?
- Futures traders — Section 1256 contracts are explicitly exempt
- Forex traders under Section 988
- Traders who have elected Mark-to-Market under IRC §475
- Short sellers (different rules apply)
- Crypto — currently exempt, though legislation to change this is pending
How to Avoid Wash Sales Legally
- Wait 31 days before repurchasing the same security after a loss sale
- Switch to substantially different but economically similar securities during the 31-day period
- Elect mark-to-market (MTM) accounting — eliminates wash sales entirely for eligible traders
- Use futures instead of ETFs for index exposure — Section 1256 contracts are exempt
- Track wash sales carefully using professional tax software or a specialized CPA
Does Your Broker Track Wash Sales for You?
Brokers are required to track wash sales within a single account and report them on your 1099-B. However, brokers are NOT required to track wash sales across multiple accounts. If you trade the same securities across multiple brokerage accounts, IRAs, or spouse accounts — the cross-account wash sale tracking is entirely your responsibility.
This is one of the most dangerous gaps in trader tax compliance — and one of the most common audit triggers the IRS uses against active traders.
Not Sure Where You Stand on Taxes?
Answer 8 quick questions. Get a personalized AI summary of your tax exposure, missed deductions, and what you should do next — reviewed by a real CPA.
Get My Free Tax Snapshot →