Wash sale

A wash sale is the sale of stock (or securities more generally) at a loss when substantially identical securities were acquired shortly before or after the date of sale. Wash sale regulations disallow most investors from using the value of a loss realized in a wash sale as a tax deduction.

In the United States, the Internal Revenue Code defines a wash sale as having occurred if securities were acquired within 30 days before or after the date of sale (a 61-day "window"). Wash sale rules can be thought of as a specific application of the doctrine of economic substance. That is, for an investor to receive the tax benefit of a realized capital loss, they must have changed their economic position in a "meaningful way". By specifying a 61-day period around the date of sale, the wash sale rule sets a baseline for determining if a certain pattern of securities transactions had economic substance or were instead primarily executed for the purpose of reducing taxes. In the absence of wash sale rules, an investor could sell a security at a loss and immediately repurchase it, leaving their economic position unchanged but providing them with a potential tax benefit.

Wash sales and similar trading patterns are not themselves prohibited; the rules only deal with the tax treatment of capital losses and the accounting of the ongoing tax basis. In most circumstances, tax rules in the U.S. and U.K. defer the tax benefits of losses disallowed due to wash sales. Such losses are typically added to the basis of the securities acquired in the wash sale period, essentially deferring the tax benefits until a non-wash sale occurs, if ever.