What is the Wash Sale Rule? (Don’t Accidentally Lose Deductions)
Tax Loss Harvesting is a brilliant strategy: you sell a losing stock to lower your tax bill. But if you buy that same stock back immediately because you have “FOMO” (Fear Of Missing Out), the IRS will disqualify your tax deduction. This is the Wash Sale Rule. It triggers if you buy a “substantially identical” security within 30 days before or after the sale. Here is how to calculate the 61-day window and avoid accidentally erasing your tax benefits.
1. The Rule: “Substantially Identical”
The IRS prevents you from gaming the system while keeping your position.
Substantially Identical: Selling TSLA stock and buying a TSLA Call Option. (Wash Sale).
Different: Selling TSLA and buying Ford (F). (Safe).
Gray Area: Selling an S&P 500 ETF (SPY) and buying a different S&P 500 ETF (VOO). Most CPAs advise against this, but selling SPY and buying a Total Market ETF (VTI) is generally safe.
2. The Math of a Wash Sale (Checklist)
Your loss isn’t gone; it’s just moved. Here is the accounting.
| Action | Price | Result |
|---|---|---|
| 1. Buy | 1 share @ $100 | Basis: $100 |
| 2. Sell | 1 share @ $80 | Loss: $20 (Harvested?) |
| 3. Re-Buy (Within 30 Days) |
1 share @ $85 | Wash Sale Triggered! |
| Final Status | New Basis is $105 | ($85 Price + $20 Disallowed Loss) |
3. Timeline: The 61-Day Danger Zone
The window looks both backward and forward. You cannot buy the stock before you sell it either.
| Period | Status | Impact |
|---|---|---|
| Day -30 to -1 (Prior Purchase) |
Restricted | |
| Day 0 (The Sale) |
Event | |
| Day +1 to +30 (Wait Period) |
Restricted | |
| Day +31 | Safe |
4. Strategy: The “Double Up” Trick
How to stay invested without triggering the rule.
- Scenario: You own Tesla at $200. It drops to $150. You want the tax loss, but you think it will bounce back tomorrow. You can’t wait 30 days.
- The Move: Buy more Tesla at $150 immediately. Wait 31 days. Then sell the original $200 lot.
- The Result: You capture the rebound with the new shares. You harvest the loss on the old shares after the window clears. (Risk: You are holding double the position for 30 days).
5. Warning: The IRA Death Trap
Never mix taxable and non-taxable accounts.
⛔ Permanent Destruction
If you sell a stock for a loss in your Taxable Brokerage account and buy it back in your IRA or 401(k) within 30 days:
- The Rule: It is a Wash Sale.
- The Penalty: Normally, the loss is added to the new basis. But IRAs have no cost basis. Therefore, the loss evaporates completely. You lose the money AND the tax deduction forever.