Wash Sale Rule Explained: What Every Trader Needs to Know

The wash sale rule prevents you from claiming a tax loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale. The disallowed loss gets added to the cost basis of the new position instead of being deducted immediately. For active traders who frequently enter and exit the same instruments, this rule can significantly increase your tax bill.

How the Wash Sale Rule Works

Here is a concrete example. You buy 100 shares of AAPL at $180 and sell at $170, creating a $1,000 loss. Normally, you could deduct that loss against your gains.

But if you buy AAPL again within 30 days (before or after the sale), the $1,000 loss is disallowed. Instead, it gets added to the cost basis of your new AAPL position. So if you repurchase at $172, your adjusted cost basis becomes $182 ($172 + $10 per share disallowed loss).

The 30-day window runs in both directions. Buying within 30 days before selling at a loss also triggers the rule.

Why This Hits Day Traders Hard

If you day trade the same stocks or ETFs daily, you are almost certainly triggering wash sales constantly. Every time you sell a position at a loss and re-enter the same security within the 30-day window (which is nearly every trading day for active traders), that loss gets deferred.

The problem compounds at year-end. You might have $20,000 in realized losses on paper, but after wash sale adjustments, only $5,000 is actually deductible for that tax year. The remaining $15,000 is rolled into cost basis adjustments that may not benefit you until the following year, or later.

Your broker’s 1099-B form tracks wash sales and reports the adjusted amounts, but the calculations can be complex and sometimes incorrect. Verify carefully.

What Triggers a Wash Sale

The rule applies to “substantially identical” securities. This includes:

Same stock or ETF: Selling SPY at a loss and buying SPY within 30 days
Options on the same security: Selling a stock at a loss and buying a call option on that stock
Related accounts: Buying in an IRA what you sold at a loss in a taxable account

The rule does not apply to:

Futures contracts: Section 1256 contracts are exempt from wash sale rules
Truly different securities: Selling AAPL and buying MSFT is not a wash sale
Different ETFs tracking different indices: Selling SPY and buying QQQ is generally safe

How to Manage Wash Sales

Trade futures: Futures are exempt from wash sale rules, making them tax-efficient for active traders.
Elect Section 475 mark-to-market: This election eliminates wash sale rules entirely for qualifying traders. See our guide on Trader Tax Status and Section 475.
Close all positions by year-end: If you have no open positions on December 31, wash sales from earlier in the year eventually resolve through cost basis adjustments.
Diversify instruments: Instead of trading the same stock repeatedly, rotate between uncorrelated instruments.

Learn more in our education section.

Key Takeaways

The wash sale rule disallows losses if you rebuy the same security within 30 days
Active day traders trigger wash sales constantly, inflating taxable income
Disallowed losses are added to cost basis, not permanently lost, but they are deferred
Futures contracts are exempt from wash sale rules
The Section 475 election eliminates wash sale rules for qualifying traders

Frequently Asked Questions

Do wash sales apply to crypto? As of 2025, the IRS has proposed regulations extending wash sale rules to digital assets. Check the latest IRS guidance, as this area is evolving.

Can wash sales cause me to owe taxes even if I lost money overall? Yes, in certain scenarios. If large losses are disallowed due to wash sales but your gains are fully taxable, you could owe taxes despite a net loss for the year.

Do all brokers report wash sales correctly? Brokers report wash sales on 1099-B forms, but they only track sales within the same account. Cross-account wash sales (like between a taxable and IRA account) are your responsibility to report.

Risk Disclaimer: Trading involves substantial risk of loss. Past performance is not indicative of future results. See our full risk disclaimer.