Question 1

What is the wash sale rule?

Accepted Answer

The wash sale rule disallows a tax deduction for a loss if you buy substantially identical securities within 30 days before or after the sale - a 61-day window total. The loss is not permanently lost but added to the cost basis of the replacement shares, deferring the deduction until you sell them. This prevents tax-loss harvesting while maintaining positions.

Question 2

What is the 61-day wash sale window?

Accepted Answer

The wash sale window is 61 days: 30 days before the loss sale, the day of the sale, and 30 days after. If you buy substantially identical securities anytime in this 61-day period, the loss is disallowed. Example: Sell stock at a loss on June 15 - the wash sale period runs from May 16 to July 15.

Question 3

What are "substantially identical" securities?

Accepted Answer

Substantially identical means same company stock, same mutual fund, or economically equivalent securities. Examples: (1) Apple stock = Apple stock (identical), (2) S&P 500 ETF from Vanguard ≠ S&P 500 ETF from iShares (NOT identical), (3) Stock ≠ stock options on same company (gray area), (4) Ford stock ≠ GM stock (not identical). IRS guidance is limited; consult tax advisor.

Question 4

Does the wash sale rule apply to gains?

Accepted Answer

No, the wash sale rule only applies to LOSSES. Gains are always taxable immediately. You can sell a stock for a gain and repurchase it the next day without any wash sale consequences. The rule exists to prevent tax manipulation of losses, not gains.

Question 5

How do I avoid the wash sale rule?

Accepted Answer

To avoid wash sales: (1) Wait 31+ days before repurchasing the same security, (2) Buy a similar but not identical security (e.g., different S&P 500 ETF), (3) Sell your entire position and stay out for 31 days, (4) Don't buy the same security in other accounts (IRA, spouse's account) during the window. Automatic dividend reinvestment can also trigger wash sales.

Question 6

Do wash sales affect my tax return?

Accepted Answer

Yes. Disallowed losses cannot be deducted on Schedule D in the year of sale. Your broker reports wash sales on Form 1099-B with wash sale loss amounts in Column 1g. The disallowed loss is added to the replacement shares' cost basis, deferring the deduction. This increases your current year taxes but reduces future taxes when you sell the replacement shares.

Question 7

Does the wash sale rule apply to IRAs and 401(k)s?

Accepted Answer

Yes, in a problematic way. If you sell stock at a loss in a taxable account and buy the same stock in an IRA within the 61-day window, the loss is permanently disallowed - you cannot add it to the IRA shares' basis. This creates a permanent tax detriment. Always check IRA activity before tax-loss harvesting in taxable accounts.

Question 8

What happens to my disallowed wash sale loss?

Accepted Answer

The disallowed loss is added to the cost basis of the replacement shares, and the holding period of the sold shares is added to the replacement shares. When you eventually sell the replacement shares, you'll realize the deferred loss (assuming the price hasn't changed). The loss is postponed, not eliminated, unless replacement shares are in an IRA.

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