Written by — Co-Founder, Expert Sapiens
Reviewed June 2026
Tax
What Is Wash Sale Rule?
Definition
The wash sale rule is an IRS regulation that disallows a tax deduction on a security sold at a loss if the taxpayer purchases the same or 'substantially identical' security within 30 days before or after the sale. It prevents investors from harvesting tax losses while maintaining their economic position.
Under IRS Rule 26 USC §1091, if you sell a security at a loss and repurchase the same or substantially identical security within the 61-day window (30 days before to 30 days after the sale date), the loss is disallowed for tax purposes. The disallowed loss is not permanently lost — it is added to the cost basis of the repurchased shares, deferring the loss until those shares are eventually sold. The wash sale rule applies to stocks, bonds, options, mutual funds, and ETFs. Substantially identical securities include: the same stock, options to buy the same stock, and in some cases funds tracking the same index. The rule does not apply to crypto assets (as of 2024) — though legislation to close this loophole has been proposed. Tax loss harvesting strategies must carefully account for wash sale timing.
Why it matters
Inadvertently triggering the wash sale rule can disallow tax losses you were counting on for year-end tax reduction. A tax advisor can help you implement a tax loss harvesting strategy that maximizes recognized losses while respecting wash sale rules — including identifying substantially similar but not identical replacement securities.