The wash sale rule

The wash sale rule states that a taxpayer cannot claim a loss on the sale or trade of a security if it is replaced with a substantially identical security within 30 days. This rule is intended to prevent investors from manufacturing losses for tax purposes on securities that they are essentially continuing to hold. The specifics of the wash sale rule are as follows:

  • A wash sale is considered to be any transaction where a security is disposed of and then within 30 days is replaced or the taxpayer acquires an option or contract to replace the security.
  • The rule applies if a spouse or an entity controlled by the individual obtains the replacement security.
  • The 30-day rule involves 30 calendar days, not 30 business days (which would span a longer period of time).
  • Any loss on the sale of the initial security is added to the cost basis of the replacement security.
  • The holding period of the initial security is added to the holding period of the replacement security, which likely results in a long-term holding period.
  • Any security is subject to the wash sale rule if it has a CUSIP number (a unique identifier for stocks and bonds).

The wash sale rule can be avoided by instead replacing a security with one that is similar, but not substantially identical to, the security that has been sold.