The 61-Day Window

Most people call it the “30-day rule,” but that’s only half the story. The wash sale rule covers a 61-day window: 30 days before the sale, the day of the sale, and 30 days after. If you buy a “substantially identical” security at any point during that window, your loss gets disallowed. This rule is codified in IRC Section 1091.

Think of it this way. You sell 100 shares of Apple at a $5,000 loss on March 15. If you bought Apple shares anytime between February 13 and April 14, you’ve triggered a wash sale. The $5,000 loss doesn’t disappear permanently — it gets added to the cost basis of the replacement shares — but you can’t claim it on this year’s return.

The 30-day-before rule catches a lot of people off guard. You might buy shares on March 1, then sell your older lot at a loss on March 20 thinking you’re harvesting a tax loss. Wrong. That March 1 purchase is a replacement within the window, and your loss is disallowed.

What “Substantially Identical” Means

The IRS has never published a precise definition of “substantially identical,” which is both frustrating and intentional. Here’s what we know from court rulings and IRS guidance, including IRS Publication 550:

• Same stock = always substantially identical. Selling and rebuying the same company’s shares is the textbook wash sale.
• Options on the same stock count. Selling shares at a loss and buying call options on the same stock within 30 days triggers the rule.
• Preferred vs. common stock of the same company can be substantially identical depending on terms, but usually isn’t.
• Mutual funds tracking different indexes are generally not substantially identical. Selling an S&P 500 index fund and buying a total stock market fund is typically safe, even though they overlap significantly.
• ETFs vs. mutual funds tracking the same index is a gray area. Selling Vanguard’s S&P 500 ETF (VOO) and buying their S&P 500 mutual fund (VFIAX) might be considered substantially identical since they hold the exact same portfolio. The IRS hasn’t ruled definitively, but we’d advise caution.

The safest approach: if you’re harvesting losses, switch to a different index or asset class for at least 31 days. Sell the S&P 500 fund, buy a total market or a large-cap value fund. Different enough to be safe, similar enough to maintain your market exposure.

How Disallowed Losses Add to Cost Basis

Here’s the part people miss: a wash sale doesn’t destroy your loss. It defers it. The disallowed loss gets added to the cost basis of the replacement shares, which means you’ll recognize a larger loss (or smaller gain) when you eventually sell those replacement shares. The IRS explains this adjustment in Publication 550, Chapter 4.

Example: you bought Stock A for $10,000. You sell it for $7,000, taking a $3,000 loss. Within 30 days, you buy Stock A again for $7,500. Wash sale triggered — the $3,000 loss is disallowed. But your new cost basis isn’t $7,500. It’s $7,500 + $3,000 = $10,500. When you eventually sell those replacement shares, your basis is $10,500, so you’ll pay less tax (or take a bigger loss) at that point.

Your holding period also carries over. If you held the original shares for 11 months before the wash sale, and you hold the replacement shares for 2 more months, the total holding period is 13 months — qualifying as long-term capital gains. That’s a nice benefit, since long-term rates are lower than short-term.

The IRA Trap

This is the nastiest wash sale scenario, and a lot of investors don’t know about it. If you sell a stock at a loss in your taxable brokerage account and then buy substantially identical shares in your IRA within 30 days, the wash sale rule still applies. Your loss is disallowed. The IRS addressed this in Revenue Ruling 2008-5.

But here’s the brutal part: because the replacement shares are in an IRA, you can’t add the disallowed loss to the IRA shares’ cost basis. IRAs don’t track cost basis the same way — distributions are taxed as ordinary income regardless. So the loss is effectively gone. Permanently. Not deferred, not recoverable. Just gone.

This applies to traditional IRAs, Roth IRAs, and even your spouse’s IRA. The IRS looks at all accounts you and your spouse control. We’ve seen clients lose five-figure deductions this way. It’s one of the most expensive mistakes in individual tax planning.

Cryptocurrency and the Wash Sale Rule

For years, crypto was exempt from the wash sale rule because the IRS classified digital assets as property, not securities. You could sell Bitcoin at a loss and buy it back a minute later, claiming the full loss. That loophole was widely used for tax-loss harvesting.

The landscape has shifted. The Infrastructure Investment and Jobs Act and subsequent IRS guidance have been tightening rules around digital assets. As of 2025, crypto brokers are required to report transactions on Form 1099-DA, and proposed regulations would extend wash sale treatment to digital assets. For 2026, check current IRS guidance before assuming crypto is still exempt — the rules are actively changing.

Our take: even if the wash sale rule doesn’t technically apply to crypto yet in your tax year, don’t build a strategy around a loophole that’s clearly closing. The IRS has been consistent in its direction here. For more on reporting, see our cryptocurrency tax reporting guide.

Tax-Loss Harvesting Without Triggering Wash Sales

Tax-loss harvesting — selling losing positions to offset gains — is a legitimate and effective strategy. The wash sale rule doesn’t prevent it. You just have to be thoughtful about execution.

• Wait 31 days. The simplest approach. Sell the losing position, park the cash (or invest in something clearly different) for 31 days, then buy back if you want.
• Switch to a similar but not identical fund. Sell your S&P 500 ETF at a loss and buy a Russell 1000 ETF. Both give you large-cap U.S. equity exposure, but they track different indexes. Not substantially identical.
• Sell individual stocks, buy the sector ETF. Sell your Apple shares at a loss and buy a technology sector ETF. You still have tech exposure, but you’ve diversified away from a single company. The IRS wouldn’t consider a broad tech ETF substantially identical to Apple stock.
• Harvest losses in December carefully. Year-end harvesting is popular, but remember the 30-day-after window extends into January. If you sell on December 20 at a loss, you can’t repurchase until January 20 of the following year.

For a deeper walkthrough, see our tax-loss harvesting guide. And remember that harvested losses can offset up to $3,000 of ordinary income per year (per IRC Section 1211), with any excess carrying forward indefinitely under IRC Section 1212.

Automatic Dividend Reinvestment Problems

Here’s a trap that’s easy to fall into. You sell a stock at a loss, but you’ve got dividend reinvestment (DRIP) turned on. The stock pays a dividend three weeks later, and your broker automatically buys more shares. Wash sale. Your loss is partially or fully disallowed because the DRIP purchase counts as buying substantially identical securities within the 30-day window.

If you’re planning to harvest a loss, turn off DRIP for that position before you sell. Or at minimum, be aware that the reinvested dividend shares could trigger a wash sale on the portion of shares that match.

Common Mistakes

• Buying before selling. Purchasing additional shares and then selling the old lot at a loss within 30 days. The new purchase is a replacement, and the loss is disallowed.
• Ignoring spousal accounts. Your spouse buying the same stock you just sold at a loss triggers the wash sale rule. The IRS treats you as one unit for this purpose.
• Forgetting about the IRA. As discussed above, buying replacement shares in an IRA permanently kills the loss.
• Trading the same stock frequently. Day traders and active traders often trigger wash sales repeatedly on the same security, creating a bookkeeping nightmare and potentially disallowing losses across multiple transactions.
• Not adjusting cost basis. If you do trigger a wash sale, make sure the disallowed loss gets added to your replacement shares’ basis. Your broker should handle this on your 1099-B, but verify — errors happen.

How Brokers Report Wash Sales

Your broker reports wash sales on Form 1099-B using code “W” in Box 1f. They’ll show the disallowed loss amount in Box 1g. However, brokers can only track wash sales within the same account at the same brokerage. Cross-account and cross-broker wash sales are your responsibility to track and report.

If you have accounts at Fidelity and Schwab, and you sell Apple at a loss at Fidelity then buy Apple at Schwab within 30 days, neither broker will flag it. You need to catch it yourself (or your CPA needs to catch it). Failing to report a wash sale that the IRS can see through matching 1099s is a good way to get a notice. You’ll report wash sale adjustments on Schedule D and Form 8949.

Sources & References

• IRC Section 1091 — Loss From Wash Sales of Stock or Securities
• IRS Publication 550 — Investment Income and Expenses
• IRC Section 1211 — Limitation on Capital Losses
• IRC Section 1212 — Capital Loss Carrybacks and Carryovers
• IRS Tax Topic 409 — Capital Gains and Losses
• IRS Form 1099-B — Proceeds From Broker Transactions
• IRS Form 8949 — Sales and Other Dispositions of Capital Assets
• IRS Digital Assets Guidance