Wash sale rule

A wash sale happens when you sell a security at a loss and then buy the same security, or one the tax code considers "substantially identical" (this can include certain options on the same underlying), within a set window around that sale. The tax rule tied to this is designed to stop people from selling a losing position just to book the loss for tax purposes, while intending to buy right back into the same position.

The mechanics work like this: if the repurchase falls inside the disallowed window, the loss on the original sale is not deductible in that tax year. Instead of vanishing, the disallowed loss gets added to the cost basis of the replacement shares you just bought. That higher basis means a smaller taxable gain (or a bigger deductible loss) whenever you eventually sell those replacement shares for good, so the loss isn't erased, it's deferred and rolled forward.

The part that trips up beginners, especially active or day traders, is that the window runs on both sides of the sale date, not just after it, and it applies per security or substantially identical position across ALL of your accounts, including IRAs, not just the one account where you made the trade. So buying back a stock in a separate brokerage account, or even in a spouse's account in some interpretations, can still trigger the rule. Day traders who repeatedly re-enter the same ticker after a loss, which is a completely normal trading behavior, can end up with wash sale adjustments on nearly every losing trade in a given name.

The practical effect for someone trading frequently is bookkeeping complexity rather than a real economic loss of money, since the disallowed loss is added to basis and can be recovered later. But it does mean your 1099 or trade log may show disallowed losses that look alarming until you understand they're deferred, not gone.