The Wash Sale Rule for Traders: How It Works and How to Track It

This article is general information about US tax rules, not tax advice. Rules change and depend on your situation; check with a qualified tax professional.

If you sell a security at a loss and buy the same or a "substantially identical" security within 30 days before or after the sale, US tax rules generally do not let you deduct that loss at the time. This is the wash sale rule, explained in IRS Publication 550. Active traders who trade the same symbols repeatedly can run into it constantly.

The 61-day window

The window covers:

• 30 days before the sale,
• the day of the sale,
• 30 days after the sale.

Buying substantially identical securities anywhere in that window can trigger a wash sale. Buying options or contracts to acquire the same security can also count, as can purchases in some of your other accounts.

What happens to the loss

The loss is not lost forever. In general:

• The disallowed loss is added to the cost basis of the replacement shares.
• The holding period of the original shares carries over to the replacement shares.

So the loss is deferred until you sell the replacement shares without triggering another wash sale.

Example

1. You buy 100 shares at $50 and sell them at $45: a $500 loss.
2. Ten days later, you buy 100 shares again at $46.
3. The $500 loss is disallowed for now. Your basis in the new shares becomes $46 + $5 = $51 per share.
4. If you later sell the new shares at $52 with no new wash sale, your gain is $1 per share ($100), instead of $6 ($600). The deferred loss has been used.

Why active traders feel it most

A day trader who trades the same stock every day can create a chain of wash sales, with losses rolling forward from trade to trade. In many cases this washes out by year-end if the final position is closed and not repurchased within 30 days. But a loss on a position held over the year-end, or repurchased in early January, can push deductions into the next year.

Things to know

• Brokers report wash sales on Form 1099-B for identical securities in the same account, but may not catch everything, such as purchases in another account.
• Traders who qualify for trader tax status and make a valid mark-to-market election are not subject to the wash sale rule on those securities. See trader tax status.
• The treatment of section 1256 contracts is different from stocks.

Keep good records

You need dates, quantities, prices and the account for every trade, including fees. See trading records to keep. TradeThink keeps the full history of your trades and lets you export it to CSV for your accountant or tax software. It is a journal, not a tax calculator, so use your broker's tax forms and professional advice for filing.