Wash Sale (30-Day Wash Rule)
The term wash sale refers to an investor that engages in a transaction to sell a security at a loss; then acquires substantially the identical security within thirty days. Now prohibited, a wash sale was used by investors to incur a tax deductible loss without substantially changing their position in a security.
The Internal Revenue Service (IRS) 30-day wash rule prohibits investors from recognizing a loss on their federal income tax return if that same investment was reacquired within thirty calendar days of the sale of the security. In addition to the direct repurchase of a security within thirty days, wash sale rules also apply to:
- Contracts and options that allow an investor to purchase substantially identical securities.
- Fully taxable trades that result in the acquisition of substantially identical securities.
Note: The IRS 30-day rule applies to transactions that occur thirty calendar days before and after the sale of a security such as a stock or bond. The total black-out period for a wash sale is sixty-one calendar days, since the rule also includes the day of the transaction.
If an investor participates in a transaction that results in a wash sale, the following rules apply:
- A loss on the sale of the security is not deductible on a federal income tax return.
- The loss on the sale of the original security is added to the basis of the replacement security.
- The holding period for the replacement security now includes the holding period of the security that was sold.