The Wash-Sale Rule and How It Affects Investment Losses
April 1, 2026
Investors sometimes sell securities at a loss for strategic reasons. Market volatility may trigger second thoughts about a recent sale, or an investor may want to realize a loss for tax purposes while still maintaining exposure to a particular investment. However, when losses are involved, the timing of buying and selling matters. U.S. tax rules restrict certain transactions through what is known as the wash-sale rule, and failing to follow it can eliminate the expected tax benefit.
What Is the Wash-Sale Rule?
When an investment held in a taxable brokerage account is sold for less than its purchase price, the loss may typically be used to offset capital gains or reduce taxable income. The wash-sale rule exists to prevent investors from claiming a loss while essentially keeping the same investment position.
Under this rule, a loss deduction may be disallowed if the investor buys the same security—or something considered “substantially identical”—within a specific time window surrounding the sale. The restricted period includes the 30 days before and the 30 days after the sale, creating a total window of 61 days.
The wash-sale rule applies to many common investment types held in brokerage accounts, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and options. It can also apply when purchasing options or contracts that provide the right to acquire the same security.
Investors should also be aware that the rule cannot be bypassed by repurchasing the investment in a different account type. Buying the same security in a retirement account—such as an IRA or Roth IRA—within the restricted time period may still trigger the rule. Similarly, if one spouse sells a security at a loss and the other spouse buys the same investment during the restricted window, the IRS may treat the transaction as a wash sale.
Because the definition of “substantially identical” is not precisely defined in tax regulations, the IRS ultimately determines whether a transaction violates the rule.
Strategies to Help Avoid a Wash Sale
Investors who want to harvest a tax loss but maintain market exposure often look for alternative investments rather than repurchasing the same security immediately.
For example, if an individual sells a particular stock at a loss but still wants exposure to that industry, they may consider purchasing a mutual fund or ETF that focuses on the same sector. Since these funds typically hold many different securities, they are generally not considered identical to a single stock.
Using funds can be helpful because they provide diversification while maintaining similar economic exposure. However, swapping one fund for another requires caution. If two funds track the same index or hold nearly identical portfolios, they could potentially be viewed as substantially identical, although clear guidelines are limited.
Because of this uncertainty, investors may want to consult a tax professional before executing complex transactions designed to capture losses.
Another detail that sometimes surprises investors involves dividend reinvestment plans (DRIPs). If dividends are automatically reinvested to purchase additional shares of a security within the restricted window after selling that same security at a loss, those reinvested shares may count as a repurchase and trigger a wash sale.
What Happens If a Wash Sale Occurs?
If the IRS determines that a wash sale has taken place, the loss from the sale cannot be used immediately to offset gains or reduce taxable income. Instead, the disallowed loss is added to the cost basis of the replacement investment.
In addition, the holding period from the original investment is carried over to the new position. This adjustment means the tax benefit is delayed rather than entirely eliminated in most cases.
A higher cost basis may eventually reduce the taxable gain—or increase the loss—when the replacement investment is sold in the future. The carried-over holding period could also help the investment qualify for the long-term capital gains tax rate, which is often lower than short-term rates.
However, there is an important exception. If the replacement investment is purchased inside a retirement account such as a traditional IRA or Roth IRA, the disallowed loss is not added to the account’s cost basis. In that case, the tax loss is effectively lost permanently rather than deferred.
Timing Matters
The most straightforward way to avoid violating the wash-sale rule is to wait until the restricted window has passed before repurchasing the same investment. Investors must wait at least 31 days after the sale before buying back the same security.
For example, if a stock is sold at a loss on July 1, purchasing the same stock again should not occur until August 1. Similarly, buying a security and then selling it at a loss within 30 days of that purchase could also trigger the rule.
Because tax rules surrounding investment losses can be complex, many investors choose to work with financial and tax professionals who can help ensure that transactions align with both investment goals and tax regulations.
Sources:
https://www.fidelity.com/learning-center/personal-finance/wash-sales-rules-tax
Disclosure:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.