Published on
November 29, 2025
Wash Sale Rules: Impact on Capital Gains Tax
Explains the 61-day wash sale rule, how disallowed losses adjust cost basis and holding periods, and tips to avoid violations across accounts.
The wash sale rule is a tax regulation that prevents investors from claiming losses on securities sold and repurchased within a specific 61-day window. This rule ensures investors can't sell investments at a loss solely for tax benefits while maintaining the same position. Here's what you need to know:
- What triggers a wash sale? Selling a stock at a loss and repurchasing the same or a "substantially identical" security within 30 days before or after the sale.
- Key effects:
- Losses are disallowed for the current tax year.
- The disallowed loss is added to the cost basis of the new shares.
- The original holding period carries over to the new shares.
- Applies to: Stocks, bonds, ETFs, mutual funds, options, and contracts in taxable accounts.
- Does not apply to: Cryptocurrencies, commodity futures, or foreign currencies.
- Who is impacted? Active traders, tax-loss harvesters, and those managing multiple accounts.
Avoiding violations:
- Replace sold securities with different investments.
- Track trades across all accounts, including IRAs.
- Use Form 8949 for accurate reporting.
Understanding this rule helps you manage taxes effectively while staying compliant. Timing trades carefully and keeping detailed records are essential to avoid tax complications.
The IRS Wash Sale Rule | Understanding Trader Taxes - Lesson 2
How Wash Sale Rules Affect Capital Gains Tax
Understanding how wash sale rules impact your taxes is more than just knowing they exist. These rules can influence your overall tax strategy, affecting everything from current-year deductions to how you handle future gains or losses.
Disallowance of Capital Losses
When a wash sale occurs, any loss from the transaction is disallowed for the current tax year[1]. In other words, you can’t use that loss to offset other capital gains or apply it toward the $3,000 annual limit for deducting losses against ordinary income[1][2].
Here’s an example to clarify: Imagine you sell a stock at an $800 loss but then repurchase substantially identical shares within 30 days. That $800 loss cannot be deducted on your tax return for the year. The IRS enforces this rule to prevent investors from creating tax losses without actually incurring a real economic loss. If you had $5,000 in capital gains and a $2,000 loss from a wash sale, you wouldn’t be able to offset your gains with that loss - potentially leaving you with a larger tax bill.
Next, let’s look at how these disallowed losses are carried forward through cost basis adjustments.
Adjustments to Cost Basis
Wash sales don’t make those losses disappear entirely; instead, they defer the tax benefit by adjusting the cost basis of the repurchased securities[1][3].
Here’s how it works: Suppose you buy 100 shares of Stock XYZ for $1,000, then sell them at an $800 loss. Two weeks later, you buy 20 shares for $400. Since the repurchase happened within 30 days, the IRS considers this a wash sale. The $800 disallowed loss is added to the $400 repurchase price, making your new cost basis $1,200.
What does this mean when you sell? Without the wash sale, selling the 20 shares for $1,000 would result in a $600 gain. But with the adjusted cost basis of $1,200, selling at $1,000 results in a $200 loss. Essentially, the $800 loss isn’t gone - it’s just deferred, reducing your taxable income when you sell the repurchased shares.
Now, if the stock’s price drops further, the higher cost basis could lead to a larger loss when you sell. For example, selling those 20 shares for $900 would result in a $300 loss ($900 sale price minus the $1,200 adjusted basis). This mechanism ensures the loss is postponed rather than eliminated.
Effects on Holding Periods and Tax Rates
Wash sales don’t just defer losses - they also preserve the original holding period of the security, which can impact the tax rate applied to future gains[4][5].
Here’s why that matters: Short-term capital gains (from investments held a year or less) are taxed at ordinary income rates, which can go as high as 37% for high earners. Long-term capital gains, on the other hand, are taxed at lower rates - 0%, 15%, or 20%, depending on your income level[4].
For instance, let’s say you held Stock XYZ for 14 months before selling it at a loss and then repurchased it, triggering a wash sale. The original 14-month holding period carries over to the repurchased shares. Even if you sell the new shares just two months later, the total holding period exceeds one year, qualifying the gain or loss as long-term. This could lower your overall tax liability.
Keeping accurate records of holding periods is crucial, as the IRS uses this information to ensure the correct tax treatment. Mistakes in tracking could lead to misreported gains or losses, potentially resulting in higher taxes or penalties.
Common Scenarios and Examples
Understanding how wash sale rules operate in practical settings can make the concept much clearer. Here are some examples that illustrate how these rules apply to various types of transactions.
Scenario 1: Individual Stock Trades
Imagine you buy 100 shares of XYZ Corporation for $1,000 (or $10 per share). The stock price drops to $7 per share, so you sell all 100 shares for $700, realizing a $300 capital loss[4]. Two weeks later, the price rises to $6 per share, and you buy 100 shares back for $600 to maintain your position.
In this case, the IRS considers it a wash sale because you repurchased substantially identical shares within 30 days of selling them[1]. That $300 loss isn't deductible in the current year but is added to the cost basis of your new shares, making the adjusted cost basis $900 ($600 + $300)[4]. If you later sell these 100 shares for $1,000, your taxable gain would be $100 instead of $400, showing how the loss is deferred rather than erased[5].
Here’s another example: You purchase 200 shares of GHI stock for $4,000 (or $20 per share). The stock price falls to $15 per share, and you sell all 200 shares for $3,000, realizing a $1,000 capital loss[1]. Within 20 days, you buy 200 shares again at $14 per share for $2,800. This triggers a wash sale. Your adjusted cost basis for the new shares becomes $3,800 ($2,800 + $1,000)[1]. This means your cost basis per share is $19 ($3,800 ÷ 200), even though you paid $14 per share. If you later sell these 200 shares for $4,200, your taxable gain would be $400. However, if the stock declines further and you sell for $2,500, your loss would be $1,300 ($2,500 – $3,800)[3].
Now let’s explore how wash sale rules apply to funds like mutual funds and ETFs.
Scenario 2: Mutual Funds and ETFs
Wash sale rules affect mutual funds and ETFs just as they do individual stock trades[1]. However, determining what counts as "substantially identical" can be more nuanced with these investments. For example, if you sell shares of a large-cap growth mutual fund at a loss, you cannot repurchase the same fund within 30 days[2]. But you might be able to buy a different large-cap growth fund without triggering a wash sale - provided the two funds aren't considered substantially identical in their holdings and strategies[2].
The IRS evaluates "substantially identical" on a case-by-case basis. For instance, two index funds that track the same index - like the Vanguard S&P 500 ETF (VOO) and the iShares Core S&P 500 ETF (IVV) - would likely be deemed substantially identical. Selling shares of one at a loss and buying the other within 30 days would trigger a wash sale[2].
On the other hand, a large-cap growth fund and a large-cap value fund are generally not considered substantially identical due to their differing investment strategies. This distinction is crucial for tax-loss harvesting, where investors aim to offset gains while maintaining similar market exposure. Wash sales can also occur inadvertently through reinvested dividends. For example, if you sell a mutual fund at a loss and the fund automatically reinvests dividends within 30 days, a wash sale is triggered[5].
Scenario 3: Multi-Account Transactions
Wash sale rules also apply across multiple accounts, making things more intricate. These rules extend beyond a single brokerage account and include transactions across different accounts, such as traditional IRAs and Roth IRAs[2]. For instance, if you sell 100 shares of ABC stock at a loss in your taxable brokerage account and then buy substantially identical shares in your traditional IRA within 30 days, the wash sale rule applies. The loss in your taxable account is disallowed and added to the cost basis of the IRA shares[2]. This creates a complex tax situation because IRAs are tax-deferred, and the disallowed loss adjusts the basis of the shares. When you eventually withdraw funds from a traditional IRA or sell shares in a Roth IRA, the adjusted basis can influence your tax liability.
If you manage multiple brokerage accounts - like a personal account and your spouse's account - wash sale rules can apply across these accounts as well[2]. Financial institutions only track wash sales for transactions involving identical CUSIP numbers, so it’s up to you to monitor all your accounts and accurately report wash sales on your tax return using Form 8949[4].
Here’s a quick comparison of how wash sale rules apply across different account types:
| Account Type | Sale Location | Purchase Location | Wash Sale Triggered? | Tax Impact |
|---|---|---|---|---|
| Single taxable account | Brokerage Account A | Same Brokerage Account A | Yes | Loss disallowed; added to cost basis |
| Multiple taxable accounts | Brokerage Account A | Brokerage Account B | Yes | Loss disallowed; added to cost basis |
| Taxable and IRA | Taxable brokerage | Traditional IRA | Yes | Loss disallowed; basis adjustment in IRA |
| Taxable and Roth IRA | Taxable brokerage | Roth IRA | Yes | Loss disallowed; basis adjustment in Roth |
| Spouse's accounts | Your taxable account | Spouse's taxable account | Yes | Loss disallowed; added to spouse's cost basis |
Remember, the 61-day wash sale window spans 30 days before, the day of the sale, and 30 days after. This period isn’t limited to a single tax year[4]. For example, if you sell stock at a loss on December 20, 2025, and repurchase it on January 10, 2026, the wash sale rule still applies, even though the transactions occur in different tax years. Carefully planning your trades can help you avoid unexpected tax consequences and make the most of your capital gains tax strategy.
For professional guidance on wash sale rules and tax strategies, consider reaching out to Phoenix Strategy Group (https://phoenixstrategy.group).
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How to Avoid Wash Sale Violations
Avoiding wash sale violations takes careful planning, especially if you’re actively managing your portfolio or engaging in tax-loss harvesting. With the right strategies, you can stay compliant while still working toward your investment and tax goals.
Using Alternative Investments
One way to steer clear of a wash sale is by replacing a sold security with a substantially different investment. While the IRS doesn’t clearly define what “substantially identical” means, you’ll need to evaluate each situation based on the specifics.
For instance, if you sell shares of a tech company at a loss, you could buy shares of a different tech company to maintain exposure to the sector. Similarly, if you sell a large-cap growth fund at a loss, you might consider purchasing a mid-cap fund or an international stock fund - both of which track different market segments and wouldn’t be considered substantially identical. This approach also works with mutual funds and ETFs.
Cryptocurrency offers another option. Wash sale rules don’t apply to digital assets, which means you can sell cryptocurrencies like Bitcoin or Ethereum at a loss and immediately repurchase them without triggering a wash sale (though the sale itself is still a taxable event). Other investments, like commodity futures contracts and foreign currencies, are also exempt from wash sale rules.
When choosing alternative investments, it’s a good idea to document why the replacement security is not substantially identical to the one you sold. This record can help support your tax position if the IRS ever reviews your transactions.
Timing Trades for Compliance
The wash sale rule operates within a 61-day window - 30 days before the sale, the day of the sale, and 30 days after. To claim a loss, you’ll need to wait for this window to close before repurchasing the same security.
Year-end tax planning can complicate this process since the 61-day window doesn’t pause at December 31. For example, transactions that cross into the next tax year can still trigger a wash sale. To stay ahead, consider reviewing your portfolio in November to identify positions with losses and map out the 61-day windows for each sale.
You should also watch out for automatic dividend reinvestments. If dividends are reinvested into the same security within the restricted period, they could unintentionally trigger a wash sale.
Finally, coordinating trades across account types is essential to avoid issues.
IRA and Tax-Deferred Account Considerations
Wash sale rules apply across taxable accounts and tax-deferred accounts like traditional or Roth IRAs. If you sell a security at a loss in your taxable account and then buy substantially identical securities in your IRA within the 61-day window, the loss will be disallowed.
To avoid this, carefully coordinate transactions across all your accounts. One strategy is to sell a losing position in your taxable account and purchase a substantially different security in the same account to keep your portfolio balanced. After the 61-day window closes, you can repurchase the original security in either your taxable account or your IRA without triggering a wash sale.
Keep in mind that financial institutions only track wash sales for identical CUSIP numbers. If you have accounts with multiple brokers - or if you and your spouse have separate accounts - you’re responsible for monitoring wash sales across all of them. The IRS requires accurate reporting of wash sales on Form 8949.
To stay organized, maintain detailed records of every transaction across all accounts. Include dates, security names and tickers, share quantities, purchase and sale prices, and resulting gains or losses. A log that marks the safe dates for repurchasing securities can help you stay compliant and align with broader trade planning strategies.
For expert help navigating wash sale rules or creating tax-efficient investment strategies, you can consult Phoenix Strategy Group (https://phoenixstrategy.group).
Key Takeaways for Investors and Business Owners
Understanding wash sale rules is essential for managing taxable investments effectively. These rules are designed to prevent investors from creating artificial tax losses by selling securities at a loss and immediately buying back nearly identical ones within a specific time frame[1][2].
The critical window to keep in mind is 61 days: this includes the 30 days before the sale, the sale day itself, and the 30 days after. If you buy substantially identical securities during this period, the transaction triggers a wash sale[2][6]. It's important to track all your accounts since most financial institutions only monitor wash sales within their own systems, typically using identical CUSIP numbers as the identifier[4].
When a wash sale occurs, the disallowed loss isn’t gone - it’s added to the cost basis of the replacement shares. This defers the loss until you sell the replacement shares in the future[1][4]. Additionally, the holding period from the original purchase carries over, which could allow you to qualify for long-term capital gains treatment sooner[4][5].
Tax-loss harvesting remains a powerful tool for offsetting capital gains, provided you navigate the wash sale rules carefully[2]. By selling investments that have dropped in value, you can offset gains from other holdings. To avoid triggering a wash sale, you’ll need to wait the full 30 days before repurchasing the same or a similar security - or opt for a different investment to maintain market exposure. If your losses exceed your gains, you can deduct up to $3,000 annually against ordinary income ($1,500 if married filing separately), with any remaining losses carried forward indefinitely[2]. This highlights the importance of timing your trades carefully to avoid costly errors.
Here’s how to stay on track:
- Keep detailed records of every trade, including dates, prices, quantities, and security identifiers.
- Monitor the 61-day window around each sale to identify safe repurchase dates.
Year-end planning requires extra vigilance. For example, if you sell at a loss on December 15, the 61-day window extends into the next year, meaning you’d need to wait until mid-January to repurchase the same security without triggering a wash sale. Reviewing your positions and planning sales and repurchases in advance can help you stay compliant and avoid penalties[2].
For those with more complex portfolios, working with a tax advisor can be invaluable. Professionals can help you structure compliant trading strategies, accurately calculate adjusted cost bases, and coordinate transactions across multiple accounts. This level of expertise can prevent errors and potentially save you from significant tax liabilities.
When filing your taxes, report any wash sales on Form 8949, using the "W" notation in column (f)[4]. Keeping thorough documentation, including the reasoning behind each sale and the timing of repurchases, is also crucial - especially if your filings are ever audited.
It’s worth noting that certain investments, such as cryptocurrency, commodity futures contracts, and foreign currencies, are not subject to wash sale rules[2]. Depending on your investment mix, this exemption could offer additional tax planning opportunities.
For tailored financial advice, Phoenix Strategy Group (https://phoenixstrategy.group) provides services to help optimize your tax position and align your investments with your long-term goals.
FAQs
What steps can I take to avoid triggering a wash sale when harvesting tax losses?
To steer clear of a wash sale when harvesting tax losses, avoid buying the same or a substantially identical security within 30 days before or after selling it at a loss. This rule applies across all your accounts - taxable accounts, IRAs, and even accounts owned by your spouse.
A smart approach is to replace the sold security with a similar investment that isn't identical. For instance, if you sell shares of one S&P 500 index fund, you could buy shares of a different S&P 500 index fund from another provider. This way, you can keep your market exposure intact while staying compliant with the wash sale rule.
If you're unsure about the best course of action or want to fine-tune your tax strategy, reaching out to a financial advisor can be a wise move. Firms like Phoenix Strategy Group specialize in navigating complex tax rules and can guide you effectively.
How do wash sale rules apply to investments across multiple accounts, including IRAs?
The wash sale rules can play a big role in your tax planning, especially if you're trading across multiple accounts, including IRAs. Here's how it works: if you sell a security at a loss and then buy the same or a closely related security within 30 days, the IRS won't let you claim that loss on your taxes. And it doesn’t matter if the repurchase happens in a different account - your IRA included.
To avoid accidentally triggering a wash sale, it's essential to coordinate your trades across all your accounts. Working with a financial advisor or tax professional can be a smart move to stay on top of these rules and reduce any unwanted tax issues.
Why don’t wash sale rules apply to cryptocurrencies, and how can this create tax-saving opportunities?
Under U.S. tax law, cryptocurrencies are classified as property rather than securities. Because of this distinction, the wash sale rules - which stop taxpayers from claiming a loss on a security sale if they buy it back or purchase a substantially identical security within 30 days - don’t currently apply to digital assets. This means investors can sell cryptocurrencies at a loss to offset capital gains and then immediately repurchase the same asset without violating any wash sale restrictions.
This loophole can be a handy tax planning tool, especially for those wanting to reduce their tax burden while keeping their positions intact. That said, it’s important to keep an eye on developments, as Congress has floated the idea of extending wash sale rules to include cryptocurrencies. Working with a financial advisor or tax expert can help you make the most of these strategies while staying compliant with any regulatory updates.
