How does the wash-sale rule actually work?

The wash-sale rule disallows a loss on a security when you acquire a substantially identical one within 61 days — 30 days before the sale, the sale day itself, and 30 days after — and the disallowed loss is not lost but added to the basis of the replacement shares and deferred. The rule is codified in Section 1091 of the Internal Revenue Code and administered through IRS Publication 550, which works the mechanics with examples. UZU NEWS publishes information, not tax or investment advice; for filing decisions, the IRS's own documents and a qualified adviser are the authorities.

The rule exists to prevent recognizing paper losses for tax purposes while economically keeping the position. Its drafting is short; its edges — what counts as substantially identical, which accounts count, what happens across brokers — generate most of the practical questions, and the IRS answers some of them explicitly and others by long-standing practice rather than bright-line text.

What triggers a wash sale?

Three elements: a sale at a loss; acquisition of substantially identical stock or securities — including by purchase, exercise, or a dividend reinvestment plan purchase — within the 61-day window around the sale; and common ownership through the window. All three must be present. If you sell at a loss and buy back on day 31 after the sale, no wash sale — the window closed at day 30. If you sell at a gain, the rule does not apply at all; wash-sale treatment attaches only to losses, a point the IRS states plainly.

What happens to the disallowed loss?

It is deferred, not destroyed. The disallowed loss adds to the cost basis of the replacement shares, and the replacement shares' holding period includes the holding period of the sold shares — so a long-term position sold and repurchased inside the window keeps its long-term clock running, and the loss resurfaces when the replacement shares are eventually sold outside a wash-sale window. Tax forms reflect this: brokers report wash-sale adjustments on Form 1099-B, though — critically — a broker's reporting only covers activity it can see, which is where the next two edges come from.

What does "substantially identical" mean?

Here the rule gets interpretive. The IRS has stated that stock and a stock option on the same stock can be substantially identical, and that bonds or preferred stock of the same issuer may or may not be, depending on the facts — each situation is judged on its circumstances in the IRS's own wording. Two frequent practical questions, both with established but not statutory answers: selling one index fund and buying a different index fund tracking a different index is generally treated as not substantially identical, while switching between funds tracking the same index is a closer call that the IRS has not resolved with a published rule — the Service's Rev. Rul. 87-42 treatment of PCs and pearls of this area dates to depositary-share contexts, and practitioners lean on the differences-in-issuer-and-index reasoning rather than an explicit safe harbor. A measurement publication reports that state of the guidance honestly: bright lines exist for some pairs, not for others.

How do IRA and spousal accounts interact with the rule?

Through the harshest corner of the area. If you sell at a loss in a taxable account and your IRA — or, per IRS guidance for married-filing-jointly households, a spouse's account — buys substantially identical securities within the window, the loss is disallowed, and unlike the ordinary case there is no replacement-shares basis step-up inside an IRA to defer into: IRS guidance in the form of Revenue Ruling 2008-5 states the loss is not allowed on the sale and does not get added to the IRA's basis. The loss is permanently gone. Spousal purchases: IRS guidance treats a matching purchase in a spouse's account within the window as triggering the rule for married-filing-jointly households; controlled-account arrangements are an area the IRS has said it may look through.

What are the documented practical failure modes?

Four recur in IRS and practitioner material. Automatic dividend reinvestment: a DRIP purchase inside the window triggers the rule without any intent, the IRS notes the possibility explicitly. Multiple brokers: each broker's 1099-B only sees that broker's accounts, so cross-broker wash sales are the taxpayer's responsibility to detect and adjust — the IRS reminder literature says so directly. Options exercise: acquiring stock by exercise counts as acquisition, a mechanism covered in Pub 550's examples. And year-end sales in December: the 30-day tail extends into January of the next tax year, so a December loss repurchased in early January is a wash in the December year — with the adjustment carried into the next return.

Where does wash-sale commentary mislead?

Mostly by precision laundering: presenting interpretive positions — same-index fund pairs, spouse accounts, controlled accounts — as settled black-letter rules. The settled parts are the window, the loss-only scope, the basis deferral and the IRA permanence; the interpretive parts are the substantially-identical edges, where the honest formulation is "generally treated as, not ruled on." The primary sources are short and readable: the statute, Publication 550, and Revenue Ruling 2008-5, all at irs.gov. This site reports the rule's mechanics as written; a filing position is a decision that belongs to the reader and their adviser.