It is December. You are sitting on a stock that is down $5,000.
You decide to be smart: "I'll sell it now to realize the loss and lower my taxes. Then I'll buy it back next month when the price recovers."
You sell the stock. You feel good about the $5,000 tax deduction.
But when you get your 1099-B tax form, the loss is Disallowed.
You just triggered the Wash Sale Rule.
Disclaimer: Tax laws are complex. This article explains IRS Publication 550. Consult a CPA for your specific portfolio, especially regarding IRA interactions.
Sold Stock for a Loss? You Might Still Owe Taxes
1. What Is the "Wash Sale" Rule?
The IRS wants to prevent you from claiming a tax loss while effectively maintaining your position in the market.
The Rule: Your loss is disallowed if you buy a "Substantially Identical" security within 30 days BEFORE or 30 days AFTER the sale.
📅 The 61-Day Window
It is not just "waiting 30 days." The window opens 30 days before you sell and closes 30 days after.
Total: 30 Days Before + Sale Day + 30 Days After = 61 Days.
2. The Silent Killer: Dividend Reinvestment (DRIP)
This is the most common mistake.
You sell all 100 shares of Apple (AAPL) on Dec 1st to harvest a loss. You intend to wait until Jan 2nd to buy back.
The Trap: You forgot that you had "Auto-Reinvest Dividends" turned on.
On Dec 15th, Apple pays a dividend. Your brokerage automatically uses that cash to buy 0.5 shares of Apple.
Result: Because you bought Apple (even a tiny amount) within the window, you triggered a Wash Sale on a matching portion of your sale. It creates a mess on your tax forms and disallows part of your deduction.
3. What is "Substantially Identical"?
The IRS is vague, but here are the general guidelines:
- Stock to Stock: Selling Tesla and buying Tesla = Wash Sale.
- Stock to Option: Selling Tesla stock and buying a Tesla Call Option (or selling a deep-in-the-money Put) = Wash Sale.
- ETF to ETF (The Strategy):
- Selling VOO (S&P 500) and buying SPY (S&P 500)? Likely a Wash Sale (Targeting the exact same index).
- Selling VOO (S&P 500) and buying VTI (Total Market) or IVV? Generally considered Safe (Different indexes or managers).
4. The "Forever Lost" Trap (IRA & 401k)
This is the most dangerous part of the rule that few people talk about.
If you sell a stock for a loss in your Taxable Brokerage Account and buy it back within 30 days in your IRA or 401(k):
⚠️ The Loss Evaporates
Normally, a wash sale just "defers" the loss (adds it to the new basis).
But because you cannot add basis to a tax-advantaged account like an IRA, the loss is permanently disallowed. You lose the tax deduction forever.
5. The "Crypto" Loophole (2025 Status)
Currently, the Wash Sale Rule applies to Securities (Stocks, Bonds, ETFs).
As of early 2025, Cryptocurrencies are classified as Property, not Securities.
The Loophole: Technically, you can sell Bitcoin for a loss and buy it back 5 minutes later to claim the tax loss.
Legislative Warning: Congress has repeatedly proposed closing this loophole. Always check for the latest tax bill updates before attempting this strategy.
Harvest Carefully
Tax-Loss Harvesting is a powerful tool to boost your after-tax returns. But you must be disciplined.
Action Plan:
- Turn OFF Dividend Reinvestment for any stock you plan to sell for a loss.
- Check your IRA/Roth accounts to ensure you aren't buying what you just sold in your taxable account.
- If you sell an S&P 500 ETF, swap it for a Total Market ETF (VTI) to stay in the market safely.
Helpful Resources:
Investopedia: Wash Sale Rule Definition
Fidelity: Avoiding the Wash Sale Rule
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