Wash Sale Rule

Detailed Explanation

The wash sale rule under IRC Section 1091 prevents taxpayers from harvesting a tax loss while effectively keeping the same investment position. The rule applies to any sale of stock or securities at a loss when substantially identical securities are bought within a 61-day window: 30 days before the sale, the day of the sale, or 30 days after. When triggered, the realized loss is disallowed for the current year, but it is not lost forever: the disallowed amount is added to the cost basis of the replacement shares and the holding period of the original lot is tacked onto the replacement, preserving long-term character on a future sale. The rule applies across all of a taxpayer's accounts, including a spouse's accounts and entities the taxpayer controls. Importantly, a wash sale that occurs because the replacement shares were purchased in an IRA permanently eliminates the loss because basis cannot be added to a tax-advantaged account (Rev. Rul. 2008-5). The rule also reaches options, contracts to acquire substantially identical securities, and short sales. Cryptocurrency is not subject to Section 1091 under current law because crypto is classified as property rather than a security, though Congress has repeatedly proposed extending wash sale rules to digital assets in pending legislation.