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Wash Sale (30-Day Wash Rule)

Moneyzine Editor
Author: 
Moneyzine Editor
2 mins
September 25th, 2023
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Definition

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.

Explanation

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.

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