Selling at a Loss and Buying Straight Back

A wash sale occurs when an investor sells a security at a loss and buys the same or a substantially identical security within 30 days before or after the sale. When that happens, the tax loss is disallowed for the current year under the wash sale rule in section 1091 of the Internal Revenue Code.

The rule exists to stop investors claiming a tax loss while keeping essentially the same investment. Without it, anyone could sell a losing position on December 30, buy it back on December 31 and book a deduction without changing their portfolio at all.

The loss is usually not lost for good. It is added to the cost basis of the replacement shares, so the tax benefit is postponed until those shares are sold. For the full route from the exam to a career giving that advice, our complete guide to how to become an investment adviser representative covers every step.

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The 61-Day Window

The wash sale period covers the 30 days before the sale, the day of the sale and the 30 days after it, a total of 61 days. A purchase anywhere in that window can trigger the rule, including a purchase made before the losing shares were sold.

That catches a common move called doubling up. An investor who buys more shares of a falling stock, then sells the original shares at a loss within 30 days, has created a wash sale even though the new shares came first.

The window also crosses tax years. A loss on a December sale is disallowed if the investor buys back the shares in early January, which surprises many people planning year-end trades; the Series 65 Exam Preparation course at FRC builds these timing rules into its tax practice questions.

What Counts as Substantially Identical

Shares of the same company’s stock are substantially identical, and so are options or contracts to buy that stock. Buying a call option on a stock within the window after selling the stock at a loss can therefore trigger a wash sale.

Shares of a different company in the same industry are not substantially identical, even if their prices tend to move together. Bonds of the same issuer can be substantially identical if their terms, such as coupon and maturity, are essentially the same, but not if they differ significantly.

The IRS has never published a precise test for funds. Two index funds tracking the same index from different providers carry a real risk of being treated as substantially identical, while funds tracking different indexes, such as an S&P 500 fund and a total market fund, are commonly treated by practitioners as different, although that is not a formal ruling.

What Triggers a Wash Sale and What Does Not

How the Disallowed Loss Moves Into the New Shares

When a loss is disallowed, the amount is added to the cost basis of the replacement shares. The holding period of the original shares is also added to the holding period of the replacement shares, which can help the new position qualify as long-term sooner.

Worked example: an investor buys 100 shares at $50, for $5,000, and sells them on November 10 at $35, for $3,500, a loss of $1,500. On November 25, she buys 100 shares back at $36, for $3,600.

Step one: the $1,500 loss is disallowed because she repurchased within 30 days. Step two: her basis in the new shares becomes $3,600 plus $1,500, or $5,100. Step three: when she later sells at $45, for $4,500, she reports a $600 loss rather than a $900 gain, so the deferred loss has been recovered.

The overall result matches her real economics: she paid $8,600 in total and received $8,000, a net loss of $600. Our article on what cost basis is explains how this adjustment fits with the other basis rules.

Partial Wash Sales

If an investor buys back fewer shares than were sold, only part of the loss is disallowed. The disallowed portion matches the number of replacement shares compared with the number sold.

Worked example: an investor sells 200 shares at a loss of $10 per share, a total loss of $2,000, and buys 50 shares back within 30 days. Step one: 50 of the 200 shares are covered by the repurchase, or 25 percent. Step two: 25 percent of the loss, $500, is disallowed and added to the basis of the 50 new shares. Step three: the remaining $1,500 loss is allowed this year.

Dividend reinvestment often creates small partial wash sales without the investor noticing. Switching off automatic reinvestment in a position before harvesting a loss avoids the problem.

The IRA Trap: When the Loss Disappears

A purchase in the taxpayer’s own IRA or Roth IRA within the window also triggers a wash sale. Here the result is worse, because the disallowed loss cannot be added to the basis of shares held inside a retirement account.

Worked example: an investor sells 300 shares in a taxable account at a $6,000 loss and, two weeks later, buys 300 shares of the same stock in his IRA. Step one: the $6,000 loss is disallowed. Step two: because the replacement shares are in an IRA, the loss is not added to any taxable basis and is permanently lost. Step three: at a 24 percent tax rate, that costs the investor $1,440 of tax savings he will never recover.

Brokers only track wash sales within a single account and for identical securities. Purchases in another account, an IRA or by a spouse are the investor’s responsibility to identify, which is why advisers who manage a whole household review all accounts before harvesting losses, and our comparison of traditional IRA vs Roth IRA explains why those accounts sit outside normal basis rules.

Study Investment Taxation With FRC

Wash sale questions test timing, the meaning of substantially identical and the basis adjustment in a single scenario. Our Series 65 course takes you through each piece in order, with worked calculations you can practise until they are automatic.

Consider studying with FRC for every exam on your route. Explore our USA exam courses, from the SIE through the Series 7, Series 63 and Series 65.

To take advantage of the membership, explore FRC Professional Membership, which gives you a verified Digital Profile that shows employers your real-time course progress, together with the Video Resume. Current offers are on our membership deals page.

Tax-Loss Harvesting Without Breaking the Rule

Tax-loss harvesting means selling investments that have fallen in value to realise losses that offset gains elsewhere. The losses first offset gains of the same type, then gains of the other type, and up to $3,000 of any net loss can be deducted against ordinary income each year, with the rest carried forward.

There are two main ways to harvest a loss while staying invested. The first is to wait 31 days before buying back the same security, accepting the risk that the price moves in the meantime; the second is to buy a similar but not substantially identical investment immediately, keeping the client’s asset allocation and market exposure intact.

Worked example: a client sells an S&P 500 fund at an $8,000 loss and immediately buys a total stock market fund. If she has $8,000 of long-term gains taxed at 15 percent, the harvested loss saves $1,200, and if she has no gains, $3,000 offsets ordinary income this year and $5,000 carries forward. Our article on short-term vs long-term capital gains explains the netting order these losses follow.

Gains, Short Sales and Other Special Cases

The wash sale rule applies only to losses. An investor can sell a position at a gain and buy it back immediately, which some use to raise their cost basis in a year when they are in the 0 percent long-term capital gains bracket.

The rule also applies to short sales. Closing a short position at a loss and opening a new short in the same stock within 30 days can trigger a wash sale.

A sale to a related party, such as a family member, raises a separate rule that can disallow losses entirely. Advisers should treat any loss sale involving family members or controlled businesses with care and check the client’s whole financial picture.

How a Wash Sale Is Reported

When a broker identifies a wash sale within the same account, it reports the disallowed amount on Form 1099-B alongside the sale. The investor then shows the sale on the tax return with an adjustment that removes the disallowed part of the loss.

Wash sales that the broker cannot see, such as those created by a purchase in another account or by a spouse, must be identified and adjusted by the investor. Failing to make the adjustment overstates the loss, which can lead to additional tax, interest and penalties if the return is examined.

Why Advisers Track the Rule Carefully

A wash sale is not illegal or a penalty; it simply defers or, in an IRA, removes a tax benefit. The cost of getting it wrong, however, can be significant on large positions, and clients expect their adviser to prevent it.

Firms running automated tax-loss harvesting for many accounts apply rules that block repurchases of substantially identical securities for 31 days across linked accounts. Advisers who manage only part of a household’s money must ask about the other accounts, including a spouse’s.

The rule also interacts with the duty to keep portfolios suitable. Swapping into a replacement fund should not change the client’s risk profile or diversification in ways the client did not intend.

The Memory Aid

Remember “30, 1, 30”: 30 days before, the day of the sale and 30 days after, a 61-day window.

For the result, remember “lost now, found later”: a disallowed loss is added to the replacement shares’ basis and recovered when they are sold.

For the exception, remember “IRA buys it, the loss dies”: a replacement purchase in an IRA makes the loss disappear permanently.

Exam Traps to Avoid

The first trap is counting only the 30 days after the sale. Purchases in the 30 days before the sale count too.

The second trap is believing the rule applies to gains. It applies only to losses.

The third trap is assuming the disallowed loss is always lost. Normally it is added to the basis of the replacement shares; it is permanently lost only when the replacement is bought in an IRA. The fourth trap is forgetting that purchases by a spouse or in another account of the taxpayer also count.

A Client Scenario

A client holds a large position in a technology stock with a $20,000 unrealised loss, and has $25,000 of realised gains this year from selling a rental property. In late December, he asks to sell the stock for the loss and buy it back in early January, because he still believes in the company.

The adviser explains that buying back within 30 days would disallow the loss, even across the new year. The adviser offers two options: wait 31 days and accept the price risk, or buy shares in a different technology company or a sector fund for 31 days to keep similar exposure.

The adviser also checks the client’s IRA and his wife’s accounts to confirm neither holds automatic purchases of the stock. The recommendation balances the tax saving against the client’s goals and risk tolerance, and the adviser documents its suitability.

The Dictionary as a Video Library

The FRC dictionary is a study tool, not just a glossary. Every entry pairs a written explanation with deep-dive video, on-page quizzes and interactive flash cards, so you can read a concept, watch it explained and test yourself in one place.

Rules are covered in the same depth: open a rule and you will find the full explanation alongside video walk-throughs of how it applies in practice. Use the FRC dictionary to open every term in this article as its own explanation, video and quiz, from the wash sale rule itself to capital gain.

Practice Questions to Test Yourself

Question one: An investor buys 100 more shares of a stock on March 1 and sells his original 100 shares at a loss on March 20. Is this a wash sale? Yes, because the purchase falls within the 30 days before the loss sale.

Question two: An investor sells shares at a $2,400 loss and buys the same shares back 15 days later for $7,000. What is the basis of the new shares? $9,400, the $7,000 purchase price plus the $2,400 disallowed loss.

Question three: An investor sells 400 shares at a $4,000 loss and buys back 100 shares within 30 days. How much of the loss is allowed? $3,000, because 25 percent of the loss, $1,000, is disallowed for the 100 replacement shares.

Question four: An investor sells a stock at a loss and his wife buys the same stock in her own account a week later. Is this a wash sale? Yes, purchases by a spouse count under the rule.

Question five: An investor sells a stock at a gain and buys it back the next day. Does the wash sale rule apply? No, the rule applies only to losses.

Turn Tax Knowledge Into Career Evidence

Tax-loss harvesting is one of the most visible ways advisers add value, and firms want advisers who run it without costly mistakes. FRC’s Digital Profile shows employers the courses you are actively studying and the progress you have earned through assessed learning, verified by FRC, and a QR code on your resume takes them straight to it.

The FRC Video Resume lets a hiring manager hear you before the interview. Explaining clearly how to harvest a loss without triggering a wash sale is a practical skill they will recognise immediately.

Candidates returning to the exam should note that the wait after a third failure drops from 180 days to 60 days for exam windows opened on or after January 4, 2027, as explained in our article on the Series 65 retake rule change.

Related Questions

Continue with What Is Cost Basis? for how the disallowed loss changes basis, and Short-Term vs Long-Term Capital Gains for how harvested losses are netted.

For the accounts that create the IRA trap, read Traditional IRA vs Roth IRA, and for options that can trigger the rule, see Call Option vs Put Option.

Key Points to Retain

A wash sale occurs when a security is sold at a loss and the same or a substantially identical security is bought within a 61-day window running from 30 days before to 30 days after the sale. The loss is disallowed for now, added to the basis of the replacement shares, and the original holding period carries over.

Purchases in any of the taxpayer’s accounts, by a spouse or through dividend reinvestment count, and a replacement bought in an IRA makes the loss permanently lost. The rule applies only to losses, partial repurchases disallow a proportional share, and investors can harvest losses by waiting 31 days or buying a similar but not substantially identical investment.

For the exam’s structure and requirements, see the Series 65 dictionary entry, and for the role the exam leads to, read our guide to what an investment advisor representative is.