The wash-sale rule disallows a tax loss when an investor sells a security at a loss and buys a substantially identical one within 30 days before or after that sale, a 61-day window in total. The loss is not gone forever: it is added to the cost basis of the replacement shares, according to IRS Publication 550. This is general tax-mechanics education, not individualized tax or investment advice.
The rule matters most in taxable brokerage accounts, where investors sell losing positions specifically to offset gains elsewhere, a practice generally called tax-loss harvesting. Get the timing wrong and the loss deduction disappears for the current year, even though the economic loss was real.
What Triggers a Wash Sale?
A wash sale is triggered only by a loss sale followed, or preceded, by a purchase of the same or a substantially identical security within 30 calendar days on either side. IRS Publication 550 states the rule directly: if an investor sells stock or securities at a loss and, within 30 days before or after the sale, buys substantially identical stock or securities, the loss cannot be deducted.
Because the window runs both backward and forward, an investor who buys shares first and sells the older, higher-cost shares at a loss two weeks later can still trigger the rule, even without any intent to game the deduction. The IRS measures the calendar, not the investor's stated purpose.
The rule applies only to losses. A sale at a gain, followed by a repurchase of the same security the next day, has no wash-sale consequence, since the disallowance exists to stop investors from manufacturing paper losses while keeping their market position intact.
What Counts as "Substantially Identical"?
Shares of the same company bought back are substantially identical to the shares sold. Beyond that, the standard gets less precise. Publication 550 does not supply a numerical test, and outlets that cover the rule note the IRS has never formally defined the phrase, leaving determinations to fall on the specific facts.
Common stock and a corporation's convertible preferred stock can be treated as substantially identical if the preferred shares are readily convertible and carry few restrictions, since an investor holding either has essentially the same economic exposure. Two different companies in the same industry are not considered substantially identical merely because they compete, and neither are two dissimilar ETFs that happen to hold some of the same names.
What Happens to the Disallowed Loss?
The loss is not permanently forfeited. Publication 550 states that the disallowed loss is added to the basis of the new stock or securities. That higher basis reduces the taxable gain, or increases the deductible loss, whenever the replacement shares are eventually sold in a transaction that is not itself a wash sale.
In practice, this defers the tax benefit rather than eliminating it, but deferral has a real cost: the investor loses the ability to use that loss against this year's gains, and the eventual benefit depends on holding the replacement position until it is sold outside any 30-day window.
Does the Rule Reach ETFs and Mutual Funds?
The rule can apply to fund shares just as it applies to individual stocks, whenever the fund sold and the fund repurchased are substantially identical. Selling one S&P 500 index ETF at a loss and buying a different S&P 500 index ETF from another sponsor within the window is the scenario most likely to draw scrutiny, since both funds track the same index and hold close to the same securities in similar weights.
Kiplinger's coverage flags this exact pattern, along with preferred-stock conversions and purchases made by a spouse, as situations where "substantially identical" is genuinely uncertain rather than settled by a bright-line test. Investors weighing a swap between similar funds are, in effect, making a judgment call the IRS has left undefined.
How Investors Commonly Avoid Triggering It
- Wait out the full 61-day window, from 30 days before the loss sale to 30 days after, before repurchasing the same security.
- Replace the sold position with a fund or security that tracks a different index or holds a different mix of companies, rather than a near-duplicate.
- Track purchases across every account, including a spouse's, since a repurchase in a different account of the same household can still trigger the rule.
- Check trade confirmations and any automatic dividend reinvestment, which can unintentionally repurchase shares of the same security inside the window.
Reporting explained by the financial press, including analysis at Fool.com, describes the rule's mechanics the same way Publication 550 does: the disallowed loss carries forward into the basis of the replacement shares rather than vanishing, but only if the investor keeps records precise enough to prove it at tax time.
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For a related portfolios perspective, read How Portfolio Rebalancing Works, and What It Actually Fixes.
