6/19/2019 Capital Losses and the Wash Sale Rule

TAXES TAXABLE INCOME

The Wash Sale Rule for Deferring Capital Losses

Capital losses on investment transactions may be deferred

BY WILLIAM PEREZ Updated December 24, 2018

Capital losses can be a good thing at tax time. How can a loss be advantageous? Because
when your capital losses exceed your capital gains, you can take a tax deduction for the
di erence. This deduction can o set capital gains as well as other income like wages, up to
certain limits.

But a capital loss on an investment can end up Advertisement

being deferred to a later date under some

circumstances. If an investor repurchases the
same or a substantially identical security within
30 days before or after selling the original at a
loss, something called the wash sale rule
comes into play.

An Example of a Wash Sale

Suppose Joe has a taxable brokerage account
that holds 50 shares of XYZ stock with a cost
basis of $500 because he bought the stock
when it cost $10 per share. The stock is worth
only $5 per share on July 31, and he sells all 50
shares. It produces a capital loss of $250.

https://www.thebalance.com/wash-sale-rule-3192972 1/10
6/19/2019 Capital Losses and the Wash Sale Rule

Advertisement

If
Joe Advertisement

Advertisement

purchases new shares in XYZ within 30 calendar days before the sale or up to 30 calendar
days after the sale, his capital loss is deferred until he sells these new, replacement shares. 

Wash Sale Rule Defined

A wash sale consists of two transactions: An investment is sold at a loss, and one of three
purchase transactions occur within 30 days before or after the date of sale:

• Buying or otherwise acquiring substantially identical stock or securities

• Buying a contract or option to buy substantially identical stock or securities
• Buying substantially identical stock for your individual retirement account.
https://www.thebalance.com/wash-sale-rule-3192972 2/10
6/19/2019 Capital Losses and the Wash Sale Rule

The wash sale rule is also triggered if one person sells an investment at a loss and
that person's spouse or a corporation controlled by him buys the same investment within
the wash sale time period.

The wash sale time period is 61 days – Day X plus 30 days preceding that date and 30 days
after that date.

Advertisement
Deferring Losses until the Replacement
Investment is Sold

If an investor purchases the same or a Here to help

substantially identical investment within the
61-day wash sale period, the loss from the sale
transaction is disallowed, and the amount of
go right.
the loss is added to the cost basis of the
replacement investment. This functions to
defer the loss until a later date when the
replacement investment is eventually sold o . Advertisement

The replacement investment also keeps the

same holding period as the disallowed loss.

Let's say Joe sells those 50 shares of XYZ stock for $5 per share on July 31, incurring the
$250 loss. Now he purchases 50 shares of XYZ stock on August 15 when the stock is
trading at $6 per share. August 15 is within the 61-day period, so Joe's $250 loss is a wash
sale. It's disallowed, and Joe's basis in the replacement shares increases by $250. Joe's
adjusted basis in the replacement shares is $550: 50 x $6 + $250. In other words, Joe's
actual basis in the shares, which would be 50 x $6 or $300 is adjusted and increased by the
$250 loss that was not allowed.

In this example, Joe's loss is a "wash" just as though he held his original shares without
selling.

Reporting Wash Sales on Form 8949

All investment sales are reported on Form 8949 then summarized on Schedule D. The IRS
requires that the transaction is identified with code "W" in column (b), and the loss
adjustment must be reported in column (g) when a particular sales transaction is a wash

https://www.thebalance.com/wash-sale-rule-3192972 3/10
6/19/2019 Capital Losses and the Wash Sale Rule

sale. Wash sale adjustments were reported on a second line immediately underneath the
sale to show the adjustment before 2011. 

Adjusting the Cost Basis 

By adding the wash sale loss to the cost basis of the replacement shares, the loss is
deferred and can be recouped when the replacement shares are sold. The IRS advises, "If
your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost
of the new stock or securities. The result is your basis in the new stock or securities. This
adjustment postpones the loss deduction until the disposition of the new stock or
securities. Your holding period for the new stock or securities includes the holding period of
the stock or securities sold."

The Same or Substantially Identical Securities

Two investments are the same if they are exactly identical or if they are "substantially"
identical. It is easy to see when you're dealing with the same stock, mutual fund or bond.
It's a bit harder to identify when two investment securities are very similar.

Passively-managed index mutual funds based on the same underlying market index may
be substantially identical to each other, warns Kaye Thomas in his blog "Substantially
Identical Securities" on Fairmark.com. On the other hand, two bonds issued by the same
issuer might not be substantially identical. Bonds having di erent maturity dates, interest
rates or other features are generally not considered to be substantially identical to each
other. "In determining whether stock or securities are substantially identical," the IRS says,
"you must consider all the facts and circumstances in your particular case."

Wash Sale Triggered by Repurchasing an Investment through an IRA

Selling an investment at a loss in a taxable account and purchasing the same or

substantially identical investment in an IRA-based account is a wash sale. This type of
transaction would also result in the permanent disallowance of the capital loss rather than
simply a deferral to a later date. 

How to Avoid Wash Sales

In general, wash sales are best avoided whenever possible to preserve the tax benefit of
Advertisement
the capital loss. They can be avoided by simply waiting until the 61-day wash sale period is
https://www.thebalance.com/wash-sale-rule-3192972 4/10
6/19/2019 Capital Losses and the Wash Sale Rule

over before repurchasing exactly the same investment. If you want to stay invested in a
similarly-performing investment, you can purchase securities that are similar but not
substantially identical to the investment you sold o .

When a Wash Sale Might be Beneficial

Sometimes having a wash sale might turn out to be advantageous. You might find that your
capital gains will currently be taxed at the zero-percent tax rate, in which case a capital
loss is o setting that capital gain would result in no tax savings. You could then purchase
the same or substantially identical securities to defer the loss to another year when it
Advertisement
might be more beneficial to you. 

When Should You Claim Social Security? 

Age

47 See How Claiming Earlier or Later A ects Your

Annual Income  Bene t 
$ 110,000
Lifetime Bene t Monthly Bene t
Gender 
 Male Female AGE 62 Earliest you can claim $----
Anticipating Living Into 
 70s 90s 67 Your Full Retirement Age (FRA)  $----
Marital Status 
70 Age you qualify for the max monthly bene t $----
Single
Methodology

Show Results
Take The Next Step

Get a clear view of how much you may need for retirement, how you're tracking
Read Important Information towards that goal, and how Social Security ts into your overall plan.
This calculator is for illustrative
purposes only. Fidelity
Brokerage Services, Member Visit Our Planning & Guidance Center
NYSE, SIPC. © 2018 FMR LLC. All
rights reserved. 855953.1.0

SMARTASSET.COM

https://www.thebalance.com/wash-sale-rule-3192972 5/10
6/19/2019 Capital Losses and the Wash Sale Rule

PERSONAL FINANCE

Here Is a Look at the Wash Sale Rule

for Capital Gain Tax Strategies

TAXABLE INCOME

Capital Losses and How They A ect

Gains and Your Other Income

TAXABLE INCOME

BASICS Learn About ISO: If You Have Stock

Investing Tips to Improve Your Options, You Need Tax Form 3921
Investing Results

TAXABLE INCOME
TAXABLE INCOME
How to Build a Worksheet to Calculate
2019 Your Helpful Guide to Capital Capital Gains
Gains Tax Rates and Losses

https://www.thebalance.com/wash-sale-rule-3192972 6/10
6/19/2019 Capital Losses and the Wash Sale Rule

TAXABLE INCOME TAXES

Employee Stock Purchase Plans Reporting Capital Gains and Losses to

the IRS: Form 8949

TAXATION TAXABLE INCOME

What You Might Not Know About Spreading Capital Gains over Multiple
Mutual Capital Gains Years Through Installment Sales

https://www.thebalance.com/wash-sale-rule-3192972 7/10
6/19/2019 Capital Losses and the Wash Sale Rule

TAX TIPS TAXABLE INCOME

Here Is How You Harvest Capital How Receiving and Selling Gifts
Losses to Reduce Your Tax Bill Interacts With Your Taxes

TAXABLE INCOME TAX FILING BASICS

You Might Not Have to Pay Taxes on Investment Firms Must Report
the Sale of Your Home Covered Securities to the IRS

https://www.thebalance.com/wash-sale-rule-3192972 8/10
6/19/2019 Capital Losses and the Wash Sale Rule

TAXABLE INCOME MANAGING A PORTFOLIO

Yes, Bitcoin Is Taxed. Find Out How. Pay Less at Tax Time on Capital Gains
With Tax Loss Harvesting

Our Best Money Tips, Delivered

Enter your email... SIGN UP

Investing

Credit & Debt

Retirement Planning

Banking & Loans

ABOUT US COOKIE POLICY

https://www.thebalance.com/wash-sale-rule-3192972 9/10
6/19/2019 Capital Losses and the Wash Sale Rule

ADVERTISE CAREERS

TERMS OF USE CONTACT

PRIVACY POLICY EDITORIAL GUIDELINES

ALSO FROM THE BALANCE TEAM

The Balance is part of the Dotdash publishing family.

LIFEWIRE | THOUGHTCO | TRIPSAVVY | THE SPRUCE and more

https://www.thebalance.com/wash-sale-rule-3192972 10/10