Wash Sale Rule

TL;DR: The wash sale rule prevents you from claiming a tax loss if you buy back the same or a substantially identical security within 30 days before or after selling at a loss.

The wash sale rule (IRS Section 1091) creates a 61-day window — 30 days before the sale, the sale date itself, and 30 days after — during which purchasing a "substantially identical" security disqualifies the tax deduction on the loss. For stock traders, this is relatively straightforward: sell AAPL at a loss, and don't buy AAPL back within the window. But for options traders, the rule gets complicated. Buying a call option on a stock within 30 days of selling that stock at a loss can trigger a wash sale. Selling a put option that gets assigned, resulting in stock acquisition, can also trigger it. The IRS has not published exhaustive guidance on every options scenario, which creates gray areas — particularly around whether options at different strikes or expirations count as "substantially identical."

When a wash sale is triggered, the disallowed loss is not gone forever — it gets added to the cost basis of the replacement security. If you sold stock at a $1,000 loss and then bought a call option within the window, that $1,000 loss transfers to the cost basis of the call. You can eventually realize the loss when you close the replacement position (assuming you don't trigger another wash sale). However, this deferral can become a problem if it pushes the loss into a different tax year, and in the worst case, a chain of wash sales can defer losses indefinitely.

To avoid wash sale complications, the simplest approach is to wait the full 31 days before re-entering a position after taking a loss. If you want to maintain market exposure during the waiting period, you can buy a security in the same sector that is not substantially identical — for example, a different stock or a broad ETF. Some traders also use the end-of-year period strategically, harvesting losses in early December and waiting until mid-January to re-enter. Always consult a tax professional for your specific situation, as wash sale rules interact with other provisions like short-term vs. long-term capital gains treatment.