Wash sale
What is Wash sale?
A wash sale is a sale at a loss followed or preceded by an acquisition of the same or sufficiently similar exposure within a restricted period, causing special tax treatment.
Automated detection must aggregate relevant accounts and instruments only to the extent authorized and supported by law and data. A broker's form may not capture purchases at another institution or by related parties. Systems should show suspected matches, affected lots, dates, and assumptions for qualified review.
Replacement-basis adjustments must flow into later gain and loss calculations; flagging the original sale without updating the new lot leaves the ledger internally inconsistent and future estimates wrong.
United States rule
Under United States federal rules, a loss can be disallowed when substantially identical stock or securities are acquired within 30 days before or after the loss sale, creating a 61-day window. Acquisitions can include contracts or options, and related accounts or persons can matter. Other jurisdictions use different anti-avoidance rules and periods.
Tax effect
A disallowed loss is often added to replacement basis and can adjust holding period, deferring rather than permanently eliminating it. Certain replacement accounts or circumstances can produce less favorable treatment. Partial replacement can disallow only part. The exact calculation requires quantities, lots, dates, basis, account, ownership, and instrument relationship.
Substantially identical
The standard is facts-based and is not the same as merely correlated. Shares of the same company are straightforward, while different funds, share classes, options, convertible securities, and reorganizations require analysis. Similar economic exposure can still differ legally, and a different ticker does not by itself guarantee acceptable replacement.
Portfolio implications
Wash-sale rules constrain tax-loss harvesting and coordinated household trading. Dividend reinvestment, automated purchases, retirement contributions, employee plans, adviser programs, and purchases before the sale can trigger issues unintentionally. Turning off reinvestment or using a pre-reviewed replacement can help, but tracking error and opportunity cost remain.
Practical controls
Monitor all relevant purchases and sales across authorized accounts, including spouse or related-party activity where applicable. Preserve trade and settlement dates, quantities, lots, options, corporate actions, and replacement basis links. Flag rather than conclusively decide ambiguous similarity. Obtain qualified advice because broker reporting can be incomplete and jurisdictional rules differ.
Sources and further reading
- Publication 550: Investment Income and Expenses, Internal Revenue Service
- Capital Gains and Losses, Internal Revenue Service