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Wash sales occur when traders sell a stock for a loss, then repurchase it within 30 days. These types of sales are monitored by the Internal Revenue Service so that traders cannot claim a deduction for a capital gains loss and then immediately repurchase the same stock. It is important for traders to understand what wash sales are and how the wash-sale rule works in order to avoid expensive tax penalties on trades.

What is a Wash Sale?

A wash sale occurs when a trader purchases a stock and sells it for a loss, then purchases the same stock within 30 days of the sale. For example, a trader could buy 10 shares of a stock on January 1 and sell them on January 15. If the trader then purchases shares of the same stock before February 14, a wash sale has occurred.

Wash-Sale Trading

The Wash-Sale Rule

The wash-sale rule was put into place by the Internal Revenue Service (IRS) so that traders cannot use wash sales to claim tax deductions. In the absence of this rule, it would be possible for traders to take a loss on an initial trade, then profit after repurchasing the stock – and the loss on the initial trade could be used to offset capital gains taxes on the ultimate profit.

The wash-sale rule, encoded in Section 1091 of the US tax code, states that traders cannot claim capital gains losses on the original sale in the event of a wash sale. Most brokerages report wash sales at the end of the tax year so that they can be added into the capital gains/loss calculation on tax forms.

IRS Wash-Sale Rule

What Constitutes a Wash Sale?

The 30-day limit around the wash-sale rule applies under several different scenarios – in most cases, traders aren’t simply selling and repurchasing the same amount of the same stock a few weeks apart.

First, it’s important to note that a wash sale occurs only for the number of shares that were sold and re-purchased. For example, if a trader sells 50 shares of Apple for a loss and then re-purchases 20 shares within 30 days, the wash-sale rule only applies to the 20 shares – the trader can still claim a capital gains loss on the other 30 shares.

In addition, the wash-sale rule applies if traders purchase a call option for the stock within 30 days of the original sale. This is because the call option gives traders the right to re-purchase the stock, even if they don’t execute the option.

The wash-sale rule also prohibits traders from claiming a capital gains loss if they purchase shares of the same stock or call options for an IRA or other retirement account.

Finally, it is important to keep in mind that the IRS defines a wash sale as buying a “substantially similar” stock to the one originally sold. This leaves a grey area in what constitutes a wash sale since “substantially similar” is open to interpretation. This is significant because traders could try to avoid the wash-sale rule by purchasing an ETF in the same sector as the original stock – while this is generally acceptable, traders could be penalized by the IRS if the ETF is too similar to the original stock.

Wash Sale vs. Tax Loss Harvesting

The wash-sale rule also has consequences for what constitutes a short-term versus long-term gain or loss. When making a wash sale, the amount of time that you held the original position is added to the amount of time you held the secondary position in determining whether the ultimate gain or loss is short-term or long-term.

For example, a trader buys a stock and holds it for nine months, then sells it and re-purchases it 10 days later. The trader then holds it for another six months before selling for a profit. Given the wash sale, the position is considered to have been held for 15 months in total – thus, this is considered a long-term gain. 

Wash-Sale Profit

Why Traders Should Care

Traders should care about the wash-sale rule foremost because of its tax implications. The wash-sale rule can significantly reduce traders’ ability to claim capital losses against their profits at the end of the year if they frequently trade the same stocks on short timespans. Traders are particularly prone to triggering the wash-sale rule because they frequently buy and sell the same stocks on short timespans – often intraday, let alone within 30 days. It is important for traders to recognize that these short-term trades may constitute wash sales, even if they did not intend to take advantage of capital loss deductions.

That said, traders should not alter their trading strategies to avoid triggering the wash-sale rule. At the end of the day, an effective trading strategy is likely to net much more money than the money saved in capital loss deductions by avoiding wash sales. For traders who are concerned about their tax exposure and the wash-sale rule, it is a good idea to speak with an accountant about trading practices that can enhance capital loss deductions.


The wash-sale rule applies whenever traders sell and then re-purchase a single stock or call options for a single stock within 30 days. This tax rule limits the ability of traders to offset profits with capital loss deductions at the end of the year. Since traders frequently trigger the wash-sale rule with short-term trades of a handful of stocks, it is important for traders to understand how this rule works and how it can affect their tax liability.