Wash sale

The wash sale rule exists to stop investors from harvesting a tax loss while never actually giving up the position. If you sell a stock at a loss and repurchase it right away, the IRS treats the round trip as a wash — economically you still own the same investment, so the loss is not deductible that year.

The window runs 30 days before and 30 days after the sale, a 61-day period counting the trade date itself. Buying the replacement shares before the loss sale triggers the rule just as buying them after does. "Substantially identical" means the same stock or bond of the same issuer; it also reaches indirect repurchases such as buying a call option on the stock, buying a convertible security convertible into it, or acquiring the shares in a spouse's account or a controlled entity. Shares of a different company in the same industry are not substantially identical.

A disallowed loss is deferred, not destroyed. The amount is added to the cost basis of the replacement shares and the original holding period tacks on, so the deduction is recovered when the replacement position is finally sold outside a wash sale window. Suppose you buy 100 shares at $60, sell at $45 for a $1,500 loss, and repurchase at $47 twelve days later. The $1,500 is disallowed now, and the replacement basis becomes $47 + $15 = $62 per share. The rule applies only to losses; realizing a gain and repurchasing immediately is simply taxable.

Wash sales are tested across the securities and tax exam sequence. The Series 7 covers them under cost basis adjustments, the Series 6 in the context of investment company shares, and the IRS Enrolled Agent SEE Part 1 exam among the special capital asset rules. Expect questions that give you a sale date and a purchase date and ask whether the loss is deductible, or that ask for the adjusted basis of the replacement shares.