wash sale rule
An IRS rule that disallows a tax loss if you buy the same or substantially identical security within 30 days before or after the sale.
Example
“He sold his ETF for a tax loss but accidentally triggered the wash sale rule by buying the same ETF 20 days later.”
Memory Tip
WASH sale = the loss gets 'washed away' if you rebuy within 30 days.
Why It Matters
Understanding the wash sale rule is critical for tax planning because it prevents you from claiming a loss on a security sale if you repurchase it too quickly, which could otherwise reduce your taxable income. Ignoring this rule can result in disallowed deductions and higher tax bills than expected, making it essential knowledge for anyone managing investments or trying to minimize taxes through strategic selling.
Common Misconception
Many investors believe the wash sale rule only applies to buying the exact same security after a sale, but it actually covers substantially identical securities. For example, selling one S&P 500 index fund at a loss and buying a different S&P 500 index fund within the window can still trigger the wash sale rule, preventing the loss deduction.
In Practice
Suppose you buy 100 shares of ABC stock for 5000 dollars in January and it drops to 4000 dollars by March. You sell to claim a 1000 dollar loss, but then buy 100 shares of the same stock again on March 15 for 4200 dollars. The IRS will disallow your 1000 dollar loss because you repurchased within the 30-day window, and instead your new cost basis becomes 5200 dollars (the original cost plus the disallowed loss).
Etymology
A 'wash sale' was a fraudulent practice of selling and immediately rebuying to create an artificial loss. The IRS rule prevents this.
Common Misspellings
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Related Terms
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See Also
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