Wash sale rule

Wash sale happens when a trader closes his trade for a loss and 30 days before or after closing his position, buys similar security. Usually, investors make wash sales in order to claim a capital loss on this trade against capital gain.

To prevent this "Wash sale rule" is established by the IRS, the rule states that one cannot buy similar security or identical options within 30 days before or after the sale date. So the wash sale period is actually 61 days(30 days before to 30 days after the sale date).

how wash sale rule affect day traders

Here’s an example to illustrate. On Tuesday, you bought 100 shares of LMNO at $34.60. LMNO announced terrible earnings, and the stock promptly dropped to $29.32, and you sold all 100 shares for a loss of $528. Later in the afternoon, you noticed that the stock had bottomed and looked like it may trend up, so you bought another 100 shares at $28.75 and resold them an hour later at $29.25, closing out your position for the day.

The second trade had a profit of $50. You had a net loss of $478 (the $528 loss plus the $50 profit). Here’s how this works out tax-wise: The IRS disallows the $528 loss and lets you show only a profit of $50. But it lets you add the $528 loss to the basis of your replacement shares, so instead of spending $2,875 (100 shares times $28.75), for tax purposes, you spent $3,403 ($2,875 plus $528), which means that the second trade caused you to lose the $478 that you added back.

On a net basis, you get to record your loss. The basis addition lets you work off your wash-sale losses eventually, assuming that you keep careful records and have more winning trades than losing ones in any one security.

(Source - Dummies)

related article: How does gaining trader status change the wash sale restriction?