Wash-Sale Rule
An IRS rule that disallows a tax loss if a substantially identical security is purchased within 30 days before or after the sale.
What is Wash-Sale Rule?
The wash-sale rule (Section 1091 of the Internal Revenue Code) prevents investors from claiming a tax loss on an investment sale if they buy a 'substantially identical' security within 30 days before or after the sale. The disallowed loss is not permanently lost — it is added to the cost basis of the replacement security, deferring the tax benefit until the replacement is sold. The rule exists to prevent investors from creating artificial tax losses while maintaining the same economic position. 'Substantially identical' generally covers identical securities; options on the same stock; and different funds tracking the same index from the same provider.
Example
An investor sells a Vanguard S&P 500 ETF (VOO) at a $5,000 loss on December 1 and immediately buys it back on December 3. The IRS disallows the loss under the wash-sale rule. If instead they bought an iShares S&P 500 ETF (IVV) from a different provider, most tax professionals consider that not substantially identical — the loss would likely be allowed.