Why Now Daily.

Published

The Wash-Sale Rule: Timing, Replacement Shares and Basis

The U.S. wash-sale rule can defer a tax loss when substantially identical stock or securities are acquired within 30 days before or after a loss sale. It does not prohibit the sale or replacement purchase. Ordinarily the disallowed loss increases replacement-property basis and carries over holding period, but IRA…

Timeline

  1. 2026-10-12: IRS Publication 550, Revenue Ruling 2008-5 and current transaction-reporting instructions were rechecked.
  2. 2026-10-11: Primary and authoritative sources were reviewed for this guide.

The federal wash-sale rule limits when a taxpayer can deduct a loss on stock or securities. It generally applies when the taxpayer sells or trades stock or securities at a loss and acquires substantially identical stock or securities within 30 days before or after that sale. The rule does not ban either transaction and does not erase a gain. It changes the timing of a loss deduction, subject to special treatment when the replacement purchase is made in an IRA or Roth IRA. [1][2][3]

The timing window looks backward as well as forward. It covers the 30 calendar days before the sale, the sale date and the 30 days after it—a 61-day span. A replacement lot bought before the loss sale can therefore trigger the rule. Acquisitions through dividend reinvestment, options or contracts to acquire substantially identical securities can count. Waiting “30 days” without checking the precise trade dates can be one day too short; transaction records should preserve each acquisition and sale date. [1]

“Substantially identical” is a facts-and-circumstances standard, not simply “similar investment exposure.” The same company’s common shares ordinarily present the clear case. IRS guidance says securities of different corporations ordinarily are not substantially identical, although reorganizations and particular convertible securities can produce different results. Publication 550 lists factors for convertibles. It does not provide a universal safe percentage for how much two funds may overlap, so close fund or option substitutions may need professional review. [1]

If fewer replacement shares are acquired than were sold at a loss, only the matched portion is affected. Publication 550 directs taxpayers to match replacement shares to sold shares in acquisition order and provides rules for allocating loss among blocks. Multiple purchases, partial sales and different tax lots can therefore create both allowed and disallowed pieces. Specific-lot records and confirmations are essential; an account-level net number can conceal the share-by-share computation. [1]

In the ordinary taxable-account case, the disallowed loss is added to the cost of the replacement stock or securities. That higher adjusted basis generally postpones recognition until the replacement property is later disposed of in a transaction that permits the loss. The replacement property’s holding period also includes the holding period of the loss property. Calling the loss “gone” is therefore usually inaccurate; “deferred into basis” better describes this standard result. [1][3]

The IRA exception is materially different. Revenue Ruling 2008-5 says that if an individual sells stock or securities at a loss and causes an IRA or Roth IRA to purchase substantially identical property within the window, the loss is disallowed and the IRA’s basis is not increased by that loss. The ordinary taxable replacement-basis mechanism is unavailable. Because IRA activity may not appear beside the taxable sale, investors should coordinate records across their own accounts before tax-loss trades. [1][2]

A Form 1099-B is not a complete wash-sale audit. Current IRS broker instructions require reporting in box 1g in a narrower circumstance when covered, identical-CUSIP transactions occur in the same account, while allowing broader reporting in some cases. The tax rule can also reach purchases in another account, by a spouse or by a controlled corporation. Taxpayers must report a wash sale even when the broker does not show one, and correct records when statements do not capture the full situation. [1][3][4]

Before harvesting a loss, review open orders, recurring investments, employee-plan acquisitions, options, spouse activity and every taxable and retirement account. Disablement of automatic reinvestment may need to occur before the sale because the lookback already matters. Record the sold lot, replacement lot, dates, quantities, disallowed amount, adjusted basis and holding period, then reconcile Form 1099-B with Form 8949 and Schedule D. For ambiguous securities or cross-account activity, use a tax professional rather than relying only on trading software. [1][2][3][4]

Sources

  1. Internal Revenue Service — Publication 550: Investment Income and Expenses
  2. Internal Revenue Service — Revenue Ruling 2008-5
  3. Internal Revenue Service — Instructions for Form 8949
  4. Internal Revenue Service — Instructions for Form 1099-B (2026)

Related stories