For taxpayers who actively invest in the stock market, the IRS wash sale rule can be both a trap and a tax-saving opportunity—depending on how well you understand and apply it. This rule was created to prevent investors from claiming artificial losses, but if used strategically, you can stay compliant with IRS guidelines while still protecting your refund advantage. This blog explores how the wash sale rule works, its impact on your tax return, and how to navigate it effectively without jeopardizing your refund.
What Is the Wash Sale Rule?
The wash sale rule is a regulation established by the IRS under Section 1091 of the Internal Revenue Code. It prevents investors from taking a tax deduction for a security loss if they repurchase the same or “substantially identical” security within 30 days before or after the sale date.
This 61-day window—30 days before and 30 days after the sale—defines the wash sale period. The purpose of the rule is to prevent taxpayers from creating paper losses for the sole purpose of lowering their tax bill while effectively retaining the same investment position.
Why Wash Sales Affect Your Refund
Capital losses from investments can be used to offset capital gains and up to $3,000 of ordinary income, reducing your overall tax liability and potentially increasing your refund. However, if the IRS disallows your loss because of a wash sale, you lose the deduction and the corresponding refund advantage for that tax year.
That’s why understanding and correctly applying wash sale rules is critical if you’re harvesting losses for tax purposes.
What Triggers a Wash Sale?
A wash sale is triggered if you:
- Sell a stock or security at a loss
- Repurchase the same or substantially identical security within 30 days before or after the sale
This includes purchases made in any taxable account, traditional IRA, Roth IRA, or even by a spouse in a jointly-owned account. Common triggers include:
- Buying back the same stock too soon
- Automatically reinvesting dividends during the wash sale window
- Buying a similar ETF or mutual fund tracking the same index
How the Wash Sale Rule Affects Cost Basis
When a wash sale is triggered, the disallowed loss is not gone forever. Instead, it’s added to the cost basis of the repurchased security and shifts the loss forward to a future sale.
Example: You buy stock at $100 and sell it for $70, realizing a $30 loss. If you repurchase the same stock within 30 days at $72, the $30 loss is disallowed. Your new cost basis becomes $72 + $30 = $102. When you eventually sell that repurchased stock, the deferred loss will be recognized then.
Reporting Wash Sales on Form 8949 and Schedule D
Wash sales are reported on Form 8949 and summarized on Schedule D. Brokerages are required to report wash sales on Form 1099-B if the wash sale occurs within the same brokerage account, but you are ultimately responsible for tracking them across all accounts, including IRAs and external accounts.
On Form 8949, the disallowed loss is reflected in the cost basis column, and you must check the appropriate box to indicate a wash sale adjustment. Failing to report a wash sale properly could trigger a notice or audit from the IRS.
How to Avoid Wash Sale Disqualifications and Keep Your Refund
To use capital losses without triggering the wash sale rule—and preserve your refund—consider the following strategic tips:
1. Wait 31 Days Before Rebuying
The simplest way to avoid a wash sale is to wait 31 days before repurchasing the same security. This ensures you’re outside the 61-day window and can fully deduct the loss in the current year.
2. Use Similar, Not Identical, Securities
If you don’t want to miss market exposure, you can buy a similar—but not “substantially identical”—investment. For example, if you sell SPY (an S&P 500 ETF), consider buying VOO or SCHX instead, which track similar indexes but are different funds.
3. Turn Off Automatic Reinvestment
Dividend reinvestment plans (DRIPs) can inadvertently trigger a wash sale if a dividend is used to purchase the same stock within 30 days of a loss sale. Disable automatic reinvestment during the wash sale window.
4. Track Across All Accounts
Brokerages typically only flag wash sales within the same account, but you’re responsible for identifying wash sales across multiple accounts and even your spouse’s account. Keep detailed records of all trades.
5. Don’t Repurchase in an IRA
If you sell a security at a loss in a taxable account and then repurchase it in an IRA or Roth IRA within the 30-day window, the loss is permanently disallowed and cannot be added to your IRA’s basis. This is one of the harshest outcomes of the wash sale rule.
When Wash Sales Are Unavoidable
Sometimes, avoiding a wash sale may not be practical—for example, if market conditions demand urgent re-entry or if you’re following a strict investment plan. In such cases, the disallowed loss is not lost forever but deferred, as it adjusts your new cost basis. While this delays the refund benefit, you still eventually recoup the loss when the security is sold later under different conditions.
Wash Sale Rule and Tax-Loss Harvesting
Tax-loss harvesting—the strategy of selling losing positions to offset gains—is the most common reason investors encounter the wash sale rule. To make harvesting work without disqualification:
- Sell the losing security
- Immediately buy a non-identical proxy (a “tax swap”) for 31 days
- Return to the original position after the window closes, if desired
This approach lets you harvest the loss and maintain market exposure without violating the wash sale rule.
Cryptocurrency and the Wash Sale Rule
As of 2025, cryptocurrencies are not classified as “securities” under current IRS law, so the wash sale rule does not apply. This gives crypto investors more flexibility when harvesting losses. However, this exemption may be eliminated in the future, so stay updated with IRS guidance and legislation.
Software and Tools to Track Wash Sales
Given the complexity of tracking wash sales, it’s highly recommended to use portfolio management software or tax software that supports wash sale reporting. Platforms like TurboTax, TaxAct, and broker-integrated tools often include automated wash sale tracking and warnings.
Key Takeaways
- The wash sale rule disallows a capital loss if the same or substantially identical security is repurchased within 30 days
- Disallowed losses are not gone—they are added to the cost basis of the new purchase
- To avoid triggering the rule, wait 31 days or buy a dissimilar investment
- Wash sales across IRAs result in permanent loss of the deduction
- Report all wash sale adjustments on Form 8949 and Schedule D
Conclusion
The wash sale rule can be an obstacle to optimizing your tax refund—but it doesn’t have to be. By understanding how the rule works and using smart tax strategies such as waiting periods, alternative investments, and tax-loss harvesting techniques, you can stay compliant while maximizing your deductions. Proper planning and meticulous record-keeping will help you retain your refund advantage, avoid disallowed losses, and make the most of your investment tax strategy.
