The wash sale rule is an IRS regulation that prevents taxpayers from claiming a tax deduction on a security sold at a loss if a substantially identical security is purchased within 30 days before or after the sale. The rule applies to stocks, bonds, mutual funds, ETFs, and options. If triggered, the disallowed loss is added to the cost basis of the replacement security, deferring the tax benefit rather than eliminating it.
Wash Sale Rule
Definition
The wash sale rule is an IRS regulation that prevents taxpayers from claiming a tax deduction on a security sold at a loss if a substantially identical security is purchased within 30 days before or after the sale. The rule applies to stocks, bonds, mutual funds, ETFs, and options. If triggered, the disallowed loss is added to the cost basis of the replacement security, deferring the tax benefit rather than eliminating it.
Example
If you sell 100 shares of XYZ stock at a $2,000 loss on December 15 and buy 100 shares of XYZ back on January 5 (within 30 days), the $2,000 loss is disallowed for that tax year. The loss is added to the cost basis of the new shares.
Key Points
- 130-day window before and after the sale
- 2Applies to substantially identical securities
- 3Disallowed loss added to replacement security's cost basis
- 4Applies across all accounts including IRAs
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