Simple definition
A wash sale happens when you sell an investment at a loss and buy the same or a substantially identical one within 30 days before or after. The IRS then disallows the loss for now, adding it to the cost of your new shares. Think of it as the tax rules noticing you never really left the position.
Why it matters
The wash-sale rule is the main trap when you try to claim an investment loss on your taxes. Break it and the deduction you were counting on is disallowed for that year. Understanding the 30-day window before and after the sale keeps a smart tax move from quietly backfiring.
Real-life example
Suppose you sell a stock at a $1,000 loss to use on your taxes, then rebuy the same stock a week later. Because that's inside the 30-day window, the wash-sale rule disallows the loss for now; instead, it's added to the cost of your new shares. These are rounded, made-up figures.
Common mistakes
- Rebuying the same or a substantially identical security within 30 days and losing the deduction.
- Forgetting the window runs 30 days both before and after the sale, not just after.
- Assuming a wash sale erases the loss forever, when it actually shifts to the new shares' cost basis.
- Triggering a wash sale accidentally through automatic dividend reinvestment or a purchase in another account.
Pro tips
- Wait more than 30 days before rebuying the same security to keep a harvested loss.
- Consider a similar-but-not-identical investment to stay in the market without a wash sale.
- Watch automatic reinvestments, which can quietly trigger the rule.
- Track the adjusted cost basis, since a disallowed loss is added to your new shares.
Related Money Dictionary terms
- Tax-Loss HarvestingSelling investments at a loss on purpose to offset taxable gains and lower your tax bill for the year.
- Capital LossThe loss you take when you sell an investment for less than you paid for it.
- Cost BasisThe original amount you paid for an investment, used to figure out your taxable gain or loss when you sell.
- Capital Gains TaxThe tax you owe on the profit from selling an investment for more than you paid.
- Holding PeriodHow long you own an investment before selling, which determines whether gains are taxed as short or long term.
- Taxable AccountA standard investment account with no special tax breaks, where gains and dividends are taxed each year.
Frequently asked questions
How long is the wash-sale window?
It runs 30 days before and 30 days after the sale — a 61-day span centered on the day you sell at a loss. Buying the same or a substantially identical security anywhere in that window triggers the rule. Many people mistakenly watch only the days after the sale and forget the 30 days leading up to it.
Does a wash sale mean I lose the deduction forever?
No. The disallowed loss isn't gone — it's added to the cost basis of the new shares you bought. That larger basis reduces your taxable gain, or increases a future loss, when you eventually sell those shares. So the tax benefit is delayed and shifted, not erased, though the timing may not be what you planned.
What counts as 'substantially identical'?
That phrase is the tricky part. Repurchasing the exact same stock or fund clearly counts. A broadly similar but different fund usually does not, though the IRS doesn't spell out every case. Because the line can be unclear, many investors avoid anything close during the window and check with a tax professional when unsure.
Knowing what Wash Sale means is knowledge — the first half. A brick gets placed when you act on it: before selling an investment at a loss for tax reasons, mark the 30-day window on both sides and plan to avoid rebuying the same security within it.
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Plain-English education — not personalized legal, tax, or investment advice.