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Wash Sale

A wash sale occurs when an investor sells a security at a loss and then repurchases the same or a substantially identical security within 30 days before or after the sale. Under U.S. tax law, wash sales are disallowed for tax purposes, meaning the investor cannot claim the loss to offset capital gains if they repurchase the security within the 30-day window. This rule prevents taxpayers from realizing artificial losses for tax benefits while still maintaining their position in the security.

Example

An investor sells 100 shares of a stock at a loss on December 1 and repurchases the same stock on December 15. This is considered a wash sale, and the loss cannot be deducted for tax purposes.

Key points

• Occurs when an investor sells a security at a loss and repurchases the same or similar security within 30 days.

• The loss from the sale cannot be deducted for tax purposes under U.S. tax law.

• Intended to prevent taxpayers from creating artificial losses to reduce taxable income.

Quick Answers to Curious Questions

It prevents investors from claiming tax losses on securities they repurchase within 30 days, ensuring they cannot create artificial losses for tax benefits.

By waiting at least 31 days before repurchasing the same or substantially identical security after selling it at a loss.

The disallowed loss is added to the cost basis of the repurchased security, effectively deferring the tax benefit until the investor sells the new position.