Wash Sale Rule: What It Is and Why It Matters

When dealing with Wash Sale Rule, a tax provision that blocks a loss claim if you repurchase the same or substantially identical security within 30 days before or after the sale. Also known as 30‑day wash rule, it prevents investors from creating artificial tax losses while keeping their position, the IRS is basically saying “don’t cheat the system.” The rule applies to stocks, ETFs, options and, increasingly, crypto assets that are treated as property for tax purposes. If you sell at a loss and buy back too soon, the loss is disallowed and added to the cost basis of the new purchase, which can push future gains higher.

Most traders use Tax Loss Harvesting, a strategy that sells losing positions to offset taxable gains. The wash sale rule is the main roadblock to that tactic. To stay on the right side of the IRS, you need a clear calendar: track every sale, note the date, and make sure you wait at least 31 days before re‑entering the same security. Many investors set up a “waiting list” of alternative assets—like a different sector ETF—to keep market exposure while respecting the rule.

The impact shows up on your Capital Gains Tax, the tax you owe on profits from selling assets. A disallowed loss can’t offset current gains, which means a higher tax bill this year. However, the loss isn’t lost forever; it’s rolled into the new cost basis, so when you finally sell the replacement security, the deferred loss will reduce that future gain. This timing effect is why long‑term planning matters: if you anticipate holding a position for years, a wash sale may shift a loss from a high‑tax year to a lower‑tax year.

How the Rule Touches Crypto and Other Modern Assets

Crypto adds a twist because the IRS treats each token as property, not a security. That means the wash sale rule technically applies, but the tax code hasn’t caught up with the fast‑moving market. In practice, many crypto traders still follow the 30‑day rule to avoid an audit risk. Because crypto prices swing wildly, waiting a month can feel like missing a big move, so some professionals use “tax‑efficient swaps” – selling one token at a loss and buying a different but correlated token, like swapping a losing altcoin for a stablecoin‑linked token. This keeps exposure while sidestepping the wash‑sale definition of “substantially identical.”

Another nuance is the concept of “substantially identical.” For stocks, it’s clear: buying the same ticker violates the rule. For options, it includes contracts that replicate the underlying’s performance. For crypto, the line blurs. If you sell Bitcoin at a loss and buy a Bitcoin futures contract within the window, the IRS could deem that substantially identical. The safest bet is to treat any contract that mirrors the same underlying asset as subject to the rule.

Keeping accurate records is the backbone of compliance. Modern portfolio trackers can auto‑flag potential wash sales by comparing sell dates with subsequent buys. If you’re a DIY investor, a simple spreadsheet with columns for ticker, sale date, loss amount, and re‑purchase date does the trick. When a wash sale is identified, adjust the new cost basis by adding the disallowed loss; most tax software will handle the math if you feed it the corrected numbers.

In short, the wash sale rule shapes how you plan loss harvesting, influences your capital gains tax outcome, and forces extra discipline when trading crypto. Below you’ll find a range of articles that break down the rule for different asset classes, walk through real‑world examples, and show how to stay tax‑efficient whether you’re a casual investor or a seasoned day trader.