What Is Wash Sale?
A wash sale occurs when a security is sold at a loss and a 'substantially identical' security is purchased within 30 days before or after the sale. Under US tax law, the loss is disallowed for that tax year and instead added to the cost basis of the new position.
The rule prevents traders from booking artificial losses for tax purposes while maintaining their position. Active traders who frequently buy and sell the same stocks need to track wash sales carefully — a year of small losses can be entirely disallowed if positions are re-entered too quickly.
Crypto has historically been exempt from US wash-sale rules (it's classified as property, not securities), though legislation has proposed closing this gap. For securities, automated brokerage tax reports handle wash sales, but it's still essential to understand the rule, especially for end-of-year tax-loss harvesting.
Related terms
- Risk Management — The systematic process of identifying and controlling exposure to losses.
- Maximum Drawdown — The largest peak-to-trough decline in account value or strategy returns.
- Expectancy — The average profit or loss per trade, given win rate and average win/loss size.