Wash Sale Rule

The wash sale rule prevents you from gaming the tax system by selling an investment for a loss, claiming the tax deduction, then immediately buying it back.

The Rule: You CANNOT claim a capital loss if you:

• Sell a stock/fund at a loss, AND
• Buy the same (or "substantially identical") investment within 30 days before or after the sale

The 30-Day Window:

• 30 days BEFORE the sale
• Day of sale
• 30 days AFTER the sale
• Total: 61-day window where you can't repurchase

Example Violation:

• Dec 10: Sell Apple stock for $5,000 loss
• Dec 15: Buy Apple stock again
• Result: $5,000 loss is disallowed
• The loss is added to the cost basis of the new shares (deferred, not lost forever)

What "Substantially Identical" Means:

Definitely Identical:

• Same stock (Apple → Apple)
• Same ETF (VOO → VOO)
• Same mutual fund

Probably Identical (IRS may disallow):

• Apple stock → Apple call options
• VOO → SPY (both S&P 500 ETFs)

Definitely NOT Identical:

• Apple → Microsoft
• VOO → VTI (S&P 500 vs. Total Market)
• Individual stock → sector ETF

Workarounds for Tax-Loss Harvesting:

Strategy 1: Wait 31 Days

• Sell losing position
• Wait 31 calendar days
• Buy it back
• Risk: Price might recover during wait

Strategy 2: Buy Similar (Not Identical)

• Sell VOO (S&P 500 ETF)
• Buy VTI (Total Market ETF) immediately
• Maintain market exposure, avoid wash sale

Strategy 3: Double Down Then Sell

• Own Apple at $10,000 loss
• Buy $10,000 MORE Apple today
• Wait 31 days
• Sell original shares at loss
• Keep new shares

Broker Tracking: Most brokers flag wash sales on Form 1099-B. But they only track within the same account—if you have multiple accounts (including spouse's IRA!), you must track manually.

IRA Trap: Selling in taxable account at a loss, then buying in IRA within 30 days = permanent loss disallowance (can't be added to cost basis).

Penalty: No penalty, just loss disallowed. The disallowed loss gets added to cost basis of replacement shares—you eventually get the benefit when you sell those.