The Wash Sale Rule — In Plain Words

This page is educational only. It is not financial advice.

Every fact on this page comes from one source.

That source is IRS Publication 550, Investment Income and Expenses.

The wash sale rules are in chapter 4 of that publication, in the section called “Wash Sales.”

This page puts that section into plain words.

It adds nothing from any other source.

The short answer

A wash sale happens when you sell stock or securities at a loss.

And, within 30 days before or after that sale, you buy substantially identical stock or securities.

Publication 550 says you cannot deduct a loss from a wash sale.

The loss is not simply gone, in most cases.

You add the disallowed loss to the cost of the new stock or securities.

That added cost becomes your basis in the new stock or securities.

Publication 550 says this postpones the loss deduction until you dispose of the new stock or securities.

Your holding period for the new stock or securities also includes the time you held the old ones.

What a wash sale is

Publication 550 states the opening rule this way.

You cannot deduct losses from sales or trades of stock or securities in a wash sale.

There is one exception in that opening sentence.

The loss can be deducted if it was incurred in the ordinary course of your business as a dealer in stock or securities.

Publication 550 then defines a wash sale.

A wash sale occurs when you sell or trade stock or securities at a loss.

And within 30 days before or after the sale, you do one of these four things:

1. Buy substantially identical stock or securities;
2. Acquire substantially identical stock or securities in a fully taxable trade;
3. Acquire a contract or option to buy substantially identical stock or securities; or
4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

That is the full list Publication 550 prints.

If your spouse or a corporation you control buys the stock

Publication 550 states this case in one sentence.

If you sell stock and your spouse buys substantially identical stock, you also have a wash sale.

The same is true if a corporation you control buys substantially identical stock.

What happens to the loss

The loss on the sale is disallowed.

That means you cannot deduct it for that sale.

Publication 550 then states what happens to the disallowed amount.

Add the disallowed loss to the cost of the new stock or securities.

The result is your basis in the new stock or securities.

Publication 550 says this adjustment postpones the loss deduction until the disposition of the new stock or securities.

There is one exception printed in that same passage.

The basis addition does not apply in case (4) in the list above.

Case (4) is acquiring substantially identical stock for your IRA or Roth IRA.

Publication 550 prints that exception in the basis passage itself.

In the “Wash Sales” section, Publication 550 does not state what happens to the disallowed amount instead in that IRA case.

So this page does not state it either.

The holding-period rule

Publication 550 states the holding-period rule in the “Wash Sales” section.

Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

Publication 550 states the same rule again in its holding-period material in chapter 4.

There, it says your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.

Publication 550's own example

This is Example 1 from the “Wash Sales” section of Publication 550.

The figures are Publication 550's own figures.

You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050. — IRS Publication 550, “Wash Sales,” Example 1

Publication 550 also prints a second example with no dollar amounts.

An employee receives 10 shares of the corporation's stock as a bonus award under an incentive pay plan.

The employee includes the fair market value of the stock in gross income as additional pay.

The employee later sells those shares at a loss.

If the employee receives another bonus award of substantially identical stock within 30 days of the sale, the employee cannot deduct the loss on the sale.

If you buy more or fewer shares than you sold

Publication 550 covers this case directly.

The number of shares you buy within 30 days before or after the sale may be more or less than the number you sold.

When that happens, you must determine the particular shares the wash sale rules apply to.

You do this by matching the shares bought with an equal number of the shares sold.

Match the shares bought in the same order that you bought them, beginning with the first shares bought.

The shares or securities so matched are subject to the wash sale rules.

Publication 550 prints this worked example for that rule.

The figures and dates are Publication 550's own.

You bought 100 shares of M stock on September 20, 2024, for $5,000. On December 13, 2024, you bought 50 shares of substantially identical stock for $2,750. On December 20, 2024, you bought 25 shares of substantially identical stock for $1,125. On January 3, 2025, you sold for $4,000 the 100 shares you bought in September. You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days before the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 13, 2024, is increased by two-thirds (50 ÷ 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 20, 2024, is increased by the rest of the loss to $1,375 ($1,125 + $250). — IRS Publication 550, “More or less stock bought than sold,” Example 1

Publication 550 prints a second example under the same heading.

In it, a $1,000 loss is fully disallowed.

Half of the disallowed loss ($500) is added to the basis of one block of 50 replacement shares.

The other half ($500) is added to the basis of the next block of 50 replacement shares.

That is because only the first 100 replacement shares match the 100 shares sold.

What “substantially identical” means

Publication 550 does not give a single fixed test.

It says you must consider all the facts and circumstances in your particular case.

It then states these general points.

Ordinarily, stocks or securities of one corporation are not considered substantially identical to stocks or securities of another corporation.

However, they may be substantially identical in some cases.

For example, in a reorganization, the stocks and securities of the predecessor and successor corporations may be substantially identical.

Similarly, bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation.

However, where the bonds or preferred stock are convertible into common stock of the same corporation, the relative values, price changes, and other circumstances may make them substantially identical.

Publication 550 gives this example for preferred stock.

Preferred stock is substantially identical to the common stock if the preferred stock:

• Is convertible into common stock,
• Has the same voting rights as the common stock,
• Is subject to the same dividend restrictions,
• Trades at prices that do not vary significantly from the conversion ratio, and
• Is unrestricted as to convertibility.

Other cases Publication 550 names in the same section

Options and futures contracts.

The wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities.

They do not apply to losses from sales or trades of commodity futures contracts and foreign currencies.

Warrants.

The wash sale rules apply if you sell common stock at a loss and, at the same time, buy warrants for common stock of the same corporation.

But if you sell warrants at a loss and, at the same time, buy common stock in the same corporation, the wash sale rules apply only if the warrants and stock are considered substantially identical.

Loss and gain on the same day.

A loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.

Dealers.

The wash sale rules do not apply to a dealer in stock or securities if the loss is from a transaction made in the ordinary course of business.

Short sales.

The wash sale rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities.

The period runs from 30 days before the date the short sale is complete to 30 days after that date.

Publication 550 also states rules for when a short sale is considered complete.

A short sale is considered complete on the date it is entered into if, on that date, you own identical stock or securities, or by that date you enter into a contract or option to acquire them, and you later deliver them to close the short sale.

Otherwise, a short sale is not considered complete until the property is delivered to close the sale.

Publication 550 says this treatment also applies to losses from the sale, exchange, or termination of a securities futures contract to sell.

Residual interests in a REMIC.

The wash sale rules will generally apply to the sale of your residual interest in a real estate mortgage investment conduit (REMIC).

That is so if, during the period beginning 6 months before the sale and ending 6 months after the sale, you acquire any residual interest in any REMIC.

It is also so if you acquire any interest in a taxable mortgage pool that is comparable to a residual interest.

How Publication 550 says to report it

Publication 550 describes the Form 1099-B reporting this way.

If you received a Form 1099-B, box 1g will show the amount of wash sale loss disallowed if both of these are true:

• The stock or securities sold were covered securities, and
• The substantially identical stock or securities you bought had the same CUSIP numbers as the stock or securities you sold and were bought in the same account as the stock or securities you sold.

Publication 550 then states this warning in plain terms.

You cannot deduct a loss from a wash sale even if it is not reported on Form 1099-B.

For your own return, Publication 550 says to report a wash sale transaction in Part I or Part II of Form 8949, with the appropriate box checked.

Complete all columns.

Enter “W” in column (f).

Enter as a positive number in column (g) the amount of the loss not allowed.

Publication 550 points readers to the Instructions for Form 8949 for more detail.

What this page does not cover

This page does not give ways to plan around the wash sale rule.

Publication 550's “Wash Sales” section does not give those either, so none are printed here.

This page does not decide whether any two real stocks or securities are substantially identical.

Publication 550 says that depends on all the facts and circumstances in your particular case.

This page does not state what happens to a disallowed loss amount when the replacement shares are acquired for an IRA or Roth IRA.

Publication 550's “Wash Sales” section prints the basis exception for that case, and does not state the result beyond it.

This page is educational only. It is not financial advice.