Wash Sale Rule

The wash sale rule (IRS Section 1091) disallows a claimed tax loss if you sell a security at a loss and then buy the same or a "substantially identical" security within 30 days before or after the sale. The disallowed loss is not permanently lost — it is added to the cost basis of the replacement security — but it cannot be claimed in the current tax year, which eliminates the tax benefit of loss harvesting in that period.

The 30-Day Window

The wash sale window is 61 days total: 30 days before the sale, the day of the sale, and 30 days after. If you sell AAPL at a loss on December 15 and buy AAPL again on December 20, the loss is disallowed. If you wait until January 16 to repurchase (31 days after the sale), the original loss stands. The rule applies even across different accounts — selling in your brokerage and buying in your IRA within the window triggers the wash sale rule.

What Counts as "Substantially Identical"

Exactly identical means the same stock or the same call option on the same stock. Substantially identical is broader and less precisely defined: the IRS has indicated that options with different strikes on the same underlying, or ETFs tracking the same index with slightly different compositions, may or may not qualify depending on how similar they are. Individual stocks in the same sector are generally not substantially identical. Consult a tax professional for situations involving derivatives or very similar securities.

Relevance to Active Catalyst Traders

Active intraday catalyst traders who trade the same names frequently may inadvertently trigger wash sales on positions that went against them. Tracking wash sale exposure is an important part of year-end tax management for anyone trading with meaningful frequency in a limited universe of tickers. Many brokerages now flag wash sales automatically in trade confirmations and account statements.