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Employee stock options (ESOs) may be included in an employee’s compensation package, as a way of giving an employee the opportunity to buy stock in the company at a certain price — and as an incentive to stay with the company for a period of time.

Employee stock options give employees the right to buy company stock at an established grant price once certain terms are met. But there’s no obligation to do so.

Exercising stock options means choosing to purchase the stock at the grant price, after a predetermined waiting period. If an employee doesn’t purchase the stock, the option will eventually expire.

Employee stock options may also give employees a sense of ownership (and, to a degree, actual ownership) in the company they work for. That can have benefits and drawbacks. But if you’re working in an industry in which employee stock options are common, it’s important to know how they work, the different types, and the tax implications.

What Are Employee Stock Options?

Employee stock options give an employee the chance to purchase a set number of shares in the company at a set price — often called the exercise price — over a set amount of time.

Typically, the exercise price is a way to lock in a lower price for the shares, although there are no guarantees.

This potentially gives an employee the chance to exercise their ESOs at a point when the exercise price may be lower than the market price — with the potential to make a profit on the shares.

Sometimes, an employer may offer both ESOs and restricted stock units (RSUs). RSUs are different from ESOs in that they are generally a promise of stock at a later date.

Employee Stock Option Basics

When discussing stock options, there are some essential terms to know in order to understand how these options work. (For investors who are familiar with options trading, some of these terms may sound similar. But options trading, which involves derivatives contracts, doesn’t have any bearing on employee stock options.)

•   Exercise price/grant price/strike price: This is the given set price at which employees may purchase the stock options.

•   Market price: This is the current price of the stock on the market (which may be lower or higher than the exercise price). Typically an employee would only choose to exercise and purchase the options if the market price is higher than the grant price.

•   Issue date: This is the date on which the employee is given the stock options.

•   Vesting date: This is the date after which an employee can exercise their stock options per the original terms or vesting schedule.

•   Exercise date: This is the date an employee actually chooses to exercise their employee stock options.

•   Expiration date: This is the date on which the employee’s ability to exercise their stock options expires.

How Do Employee Stock Option Plans Work?

When you’re given employee stock options, that means you have the option to buy stock in the company at the grant price. If you don’t use the options to purchase the stock within the specified period, they expire.

ESO Vesting Periods

Typically, employee stock options follow a vesting schedule, which is basically a waiting period after which you can exercise them. This means an employee must stay at the company a certain amount of time before they can exercise their stock options.

The stock options they’re offered may be fully vested on a certain date, or just partially vested over multiple years, meaning some of the options can be exercised at one date and others at a later date.

ESO Example

For example, imagine an employee was issued employee stock options on February 1 of 2026, with the option of buying 100 shares of the company at $10/share. They can exercise their options starting on February 1, 2027 (the vesting date) for 10 years, until February 1, 2037 (the expiration date).

If they chose not to exercise these options by February 1, 2037, the options would expire and the employee would no longer have the option to buy the stock at $10/share.

Now, let’s say the market price of shares in the company goes up to $20 at some point after they’ve vested in 2027, and the employee decides to exercise their options.

They would buy 100 shares at $10/share for $1,000 total — while the market value of those shares is actually $2,000. In this scenario, the vesting period allowed the stock to grow and deliver a profit. But the reverse could also occur: The share price could drop to $8, in which case the employee wouldn’t exercise their options because they’d lose money. Instead, they might choose to wait and see if the share price rebounds.

Exercising Employee Stock Options

You don’t need to exercise your employee stock options unless it makes sense for you. You’re under no obligation to do so. Whether you choose to do so or not will likely depend on your financial situation and financial goals, the forecasted value of the company, and what you expect to do with the shares after you purchase them.

If you plan to exercise your ESOs, there are a few different ways to do so. The shares you get are effectively the same as the shares available on online investing platforms and brokerages, but some companies have specifications about when the shares can be sold, typically because they don’t want employees to exercise their options and then sell off all their stock in the company immediately.

Buy and Hold

Once you own shares in the company, you may choose to hold onto them — effectively, a buy-and-hold strategy. To continue the example above, you could buy the 100 shares with $1,000 cash and you would then own that amount of stock in the company — until you decide to sell your shares (if you do).

Cashless Exercise

Another way to exercise your ESOs is with a cashless exercise, which means you sell off enough of the shares at the market price to pay for the total purchase.

For example, you would sell off 50 of your purchased shares at $20/share to cover the $1,000 that exercising the options cost you. You would be left with 50 shares. Most companies offering brokerage accounts may do this buying and selling simultaneously.

Stock Swap

A third way to exercise options is if you already own shares. A stock swap allows you to swap in existing shares of the company at the market price of those shares and trade for shares at the exercise price.

For example, you might trade in 50 shares that you already own, worth $1,000 at the market price, and then purchase 100 shares at $10/share.

When the market price is higher than the exercise price — often referred to as options being “in the money” — you may be able to gain value for those shares because they’re worth more than you pay for them.

Why Do Companies Offer Stock Options?

The idea behind employee stock options is generally that if employees are financially invested in the success of the company, then they’re more likely to be emotionally invested in its success as well, and this may increase employee productivity and loyalty.

From an employee’s point of view, stock options may offer a way to see some financial benefit of their own hard work. In theory, if the company is successful, then the market stock price could rise and the stock options could be worth more.

The financial prospects of the company typically influence whether people want to buy or sell shares in that company, but there are a number of factors that can determine stock price, including investor behavior, company news, world events, and primary and secondary markets.

Tax Implications of Employee Stock Options

There are two main kinds of employee stock options: qualified and non-qualified, each of which has different tax implications. These are also known as incentive stock options (ISOs) and non-qualified stock options (NSOs or NQSOs).

Incentive Stock Options (ISO)

When you buy shares in a company below the market price, you could be taxed on the difference between what you pay and what the market price is. ISOs are “qualified” for preferential tax treatment, meaning no taxes are due at the time you exercise your options — unless you’re subject to an alternative minimum tax.

Instead, taxes are due at the time you sell the stock and make a profit. If you sell the stock more than one year after you exercise the option and two years after they were granted, then you will likely only be subject to capital gains tax.

If you sell the shares prior to meeting that holding period, you will likely pay additional taxes on the difference between the price you paid and the market price as if your company had just given you that amount outright. For this reason, it may often be financially beneficial to hold onto ESO shares for at least one year after exercising, and two years after your exercise date.

Non-qualified Stock Options (NSOs or NQSOs)

NSOs do not qualify for preferential tax treatment. That means that exercising stock options subjects them to ordinary income tax on the difference between the exercise price and the market price at the time you purchase the stock. Unlike ISOs, NSOs will always be taxed as ordinary income.

Taxes may be specific to your individual circumstances and vary based on how the company has set up its employee stock option program, so it may be a good idea to consult a financial advisor or tax professional for specifics.

Should You Exercise Employee Stock Options?

While it’s impossible to know if the market price of the shares will go up or down in the future, there are a number of things to consider when deciding if you should exercise options:

•   The type of option — ISO or NSO — and related tax implications

•   The financial prospects of the company

•   Your own investment portfolio, and how these company shares might fit into your overall investment strategy

You also might want to consider how many shares are being made available, to whom, and on what timeline — especially when weighing what stock options are worth to you as part of a job offer. For example, if you’re offered shares worth 1% of the company, but then the next year more shares are made available, you could find your ownership diluted and the stock would then be worth less.

The Takeaway

Employee stock options (ESOs) can be an incentive that companies may offer their employees. They present the opportunity to invest in the company directly, and possibly profit from doing so. There are certain rules around ESOs, including timing of exercising the stock options, as well as different tax implications depending on the type of ESO a company offers its employees.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Invest with as little as $5 with a SoFi Active Investing account.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

What happens to my stock options if I leave the company?

It depends on whether the stock options are vested or unvested. Employee stock options typically have a vesting schedule, or period of time, after which you can exercise them. If the options are not vested when you leave the company, you forfeit the stock options. If the options are partially or fully vested, your employer will typically give you a specific window of time — typically between 30 to 90 days — in which to exercise them. After that window, you typically lose the options. If you’ve already bought vested options, they are yours to keep when you leave the company.

What is the difference between ISOs and NSOs?

With ISOs, or incentive stock options, you are not taxed when you exercise your options. Instead, you pay taxes when you sell the options and make a profit. If you wait at least two years after the grant date, and at least one year after exercising the ISOs before selling them, you will typically be subject to the lower capital gains tax rate instead of the ordinary income tax rate. With NSOs, or non-qualified stock options, you are taxed at your ordinary income tax rate as soon as you exercise the options.

Do I have to exercise my stock options right away?

No. You can choose not to exercise your stock options if you wish. However, there is typically an expiration date — often, about 10 years — by which time an employee must exercise their options. After that date, you generally lose the opportunity to exercise them.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOIN-Q426-053

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Wondering how much you’ll gain by investing in stocks? It helps to look at the average stock market return for the last 10, 20, and 30 years.

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Coattail investing, also known as copycat investing, is a strategy in which investors try to replicate the investment decisions of other investors they believe have a successful track record. The idea is to observe what experienced investors are buying and selling and use those decisions to inform their own portfolios.

For newer investors, coattail investing may offer a way to learn from more experienced market participants and better understand how they approach investing. However, the strategy has both potential benefits and drawbacks. It’s important for investors to carefully consider whom they follow, whether that person’s approach aligns with their own financial goals and risk tolerance, and the limitations of copying someone else’s investment decisions.

How Coattail Investing Works

Coattail investing involves observing the investment decisions of another investor and using that information to guide your own investment choices. For example, someone might research the stock holdings of a well-known money manager, follow an activist investor’s public disclosures, or monitor news about a prominent investor’s latest moves.

There are several ways to follow other investors. Public disclosures filed with the Securities and Exchange Commission (SEC), financial news coverage, interviews, and investors letters can provide information about their investment activity. For example, certain institutional investment managers with at least $100 million in qualifying securities must file quarterly form 13F reports with the SEC. These filings disclose specified holdings as of the end of the reporting quarter. However, they may not become public until 45 days after the quarter ends, so they don’t necessarily show what a manager owns today.

Some online platforms also track the portfolios or reported trades of prominent investors, making it easier to monitor their activity. However, tracking another investor’s holding is different from automatically copying their trades. The latter is generally known as copy trading and involves a platform or service that attempts to replicate another person’s transactions.

Not every investor’s activity is publicly available, and different disclosure requirements apply to different types of investors. As a result, the information available to copycat investors can vary.

Who Do Coattail Investors Follow?

Coattail investors can follow a wide range of market participants, from professional money managers to individual investors with a public track record. The investors they monitor may have different approaches, ranging from long-term stock ownership to more frequent buying and selling. The choice often depends on what information is publicly available and which investment strategies or market perspective interest them.

Here’s a look at some of the people and groups that copycat investors may monitor.

Activist Investors

Activist investors acquire significant stakes in companies and seek to influence their management, operations, or strategic direction. Their involvement can sometimes attract attention from other market participants and affect a company’s stock price.

Activist investors may disclose their positions through regulatory filings, public statements, or press releases. Financial news outlets also regularly report on their activities, making it easier for copycat investors to follow their moves.

However, by the time an activist investor’s position becomes public, the stock price may already have reacted to the news. An activist’s investment strategy may also depend on changes that take time to materialize or may never occur.

Money Managers

Professional money managers oversee assets on behalf of clients, institutions, or investment funds. Some institutional investment managers are required to report certain securities holdings to the SEC through quarterly Form 13F filings.

These filings can give copycat investors insight into the portfolios of large institutional investors. However, they have important limitations: Form 13F generally covers certain securities, not every asset a manager owns, and filings can be submitted up to 45 days after the end of a quarter.

As a result, the information may not reflect a manager’s current holdings or recent trades. Investors who use these filings to identify potential investments will want to account for the reporting delay and recognize that the manager may have already changed their position.

Large Corporations and CEOs

Some investors monitor the financial decisions of large corporations and their executives, particularly when those decisions involve significant acquisitions, strategic investments, or changes in business operations. Companies may use excess cash to fund operations, repay debt, acquire other businesses, or purchase financial assets. Their decisions can provide insight into how they view their business prospects and financial priorities.

However, a company’s financial decisions aren’t necessarily a useful model for an individual investor. Corporations have different objectives, resources, tax considerations, and risk exposures. In addition, a company’s cash holdings or strategic investments don’t necessarily reflect the personal investment decisions of its CEO.

Unlikely Visionaries

Some copycat investors look beyond the traditional financial world to follow individuals who have made notable investments in other industries. Professional athletes, celebrities, and social media personalities may have experience with business ownership, startups, or other financial ventures. Their activities can sometimes provide a different perspective on companies or industries that receive less attention from traditional market participants.

However, a successful investment doesn’t necessarily establish a consistent track record. Public figures may also have access to opportunities, resources, or financial advice that aren’t available to the average investor.

Following an athlete’s or influencer’s investment activity may provide an opportunity to learn about different businesses, but using it as a substitute for independent research is generally not advised. Building an entire portfolio around the decisions of a public figure could expose investors to risks they don’t fully understand.

What Are the Risks of Coattail Investing?

One of the main risks of coattail investing is that the investor being followed may make unsuccessful decisions. Even experienced money managers can experience losses, and a successful track record doesn’t guarantee future results.

Other risks include:

•   Delayed information: Public disclosures may not reflect an investor’s current holdings or most recent trades. By the time a copycat investor acts, the market price may have changed.

•   Different financial goals: The investor being followed may have a different time horizon, financial situation, or tolerance for risk.

•   Limited information: Knowing what another investor bought or sold doesn’t necessarily reveal why they made the decision or how it fits into their broader strategy.

•   Concentration risk: Copying a small number of investors may lead to a portfolio that is heavily concentrated in certain securities, industries, or asset classes.

•   False confidence: Following a successful investor may create the impression that a decision is less risky or requires less research than it actually does.

Coattail investing also doesn’t eliminate the need for ongoing portfolio management. Investors will still want to consider their own financial goals, diversification, and risk tolerance.

Some automated copy trading services may execute trades based on another investor’s activity, but automation doesn’t remove investment risk. Investors will want to understand how a service operates, including its fees, trading limitations, and potential tax consequences.

Ultimately, coattail investing may provide a way to learn from other market participants, but it doesn’t replace independent research or personal financial decision-making.

The Takeaway

Coattail investing, also known as copycat investing, involves following another investor’s investment decisions and using them to inform your own portfolio. Investors may monitor professional money managers, activist investors, corporations, or other individuals whose financial decisions interest them.

Although the strategy may offer insights into how experienced investors approach the market, copying their decisions comes with limitations. Public disclosures may be delayed, investment goals may differ, and even successful investors can make mistakes.

For those interested in coattail investing, learning about other investors’ strategies and researching their decisions independently may be more useful than attempting to replicate their portfolios exactly.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Invest with as little as $5 with a SoFi Active Investing account.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

What is coattail investing?

Coattail investing, also called copycat investing, is a strategy in which investors follow the buying and selling decisions of other investors, often those with an established track record. They may use public disclosures, financial news, or investment platforms to learn about another investor’s portfolio and use that information to guide their own investment decisions. However, copying another investor’s choices doesn’t guarantee similar results.

How do investors track what famous managers buy?

Investors can track the holdings of certain institutional money managers through quarterly Form 13F filings submitted to the Securities and Exchange Commission (SEC). These filings disclose certain securities holdings of institutional investment managers with at least $100 million in qualifying assets under management. Financial news outlets and online services also report on notable investment activity. However, Form 13F filings can be submitted up to 45 days after a quarter ends, so the information may not reflect current holdings.

What is the difference between coattail investing and copy trading?

Coattail investing generally involves researching another investor’s decisions and using them to inform your own portfolio. Copy trading takes this a step further by using an investment platform or service to automatically replicate another trader’s transactions, often in real time. Both approaches involve following someone else’s investment decisions, but copy trading typically requires less manual involvement. Neither approach eliminates investment risk.

What are the main benefits of coattail investing?

Coattail investing may help newer investors understand different investment strategies and discover how experienced market participants evaluate securities. It can also generate research ideas and highlight companies or industries that might otherwise be overlooked. However, following another investor’s moves does not guarantee similar results, and independent research remains important. In addition, another investor’s risk tolerance and timeline may not align with your own financial goals.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOIN-Q426-081

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A wash sale occurs when an investor sells a stock or other security at a loss and, within 30 days before or after the sale, buys or acquires the same or a “substantially identical” security. The wash-sale rule is an Internal Revenue Service (IRS) regulation that generally prevents investors from deducting losses on these transactions immediately for tax purposes.

Investors may sell securities at a loss as part of a tax strategy called tax-loss harvesting, which involves using investment losses to offset capital gains. However, if they repurchase the same or a substantially identical security within the wash-sale window, they may not be able to claim the loss as a tax deduction when they expect to.

Understanding the wash-sale rule can help investors account for potential tax consequences when selling securities at a loss.

Which Investments are Subject to the Wash-Sale Rule?

The wash-sale rule applies to most common stocks and securities, including:

•   Stocks

•   Bonds

•   Mutual funds

•   Exchange-traded funds (ETFs)

•   Options and certain other contracts to acquire securities

The rule can also apply to purchases made in an individual retirement account (IRA) or Roth IRA, as well as purchases made by a spouse. Certain securities futures contracts may also be subject to the rule.

The wash-sale rule generally does not apply to commodity futures or foreign currency trades. It also does not apply to sales of securities at a profit. For example, if an investor sells a stock at a gain and buys the same stock within 30 days, the transaction does not trigger a wash sale.

What Happens When You Trigger a Wash Sale?

Investors may sell securities at a loss as part of a tax-loss harvesting strategy, or they may decide to repurchase a security after selling it during a market downturn. The wash-sale rule is intended to prevent investors from claiming a tax deduction for a loss while maintaining substantially the same position in the security.

If an investor triggers a wash sale, the loss generally cannot be deducted immediately or used to offset capital gains on that year’s tax return. Instead, the disallowed loss is typically added to the cost basis of the replacement security, which can defer the tax benefit until the replacement security is sold.

There is an important exception: If an investor sells a security at a loss in a taxable account and purchases a substantially identical security in an IRA or Roth IRA within the wash-sale window, the loss is disallowed, but it generally is not added to the IRA’s cost basis. This means the tax benefit may be permanently lost.

The wash-sale rule can also apply if one spouse sells a security at a loss and the other spouse purchases a substantially identical security within the applicable window.

Understanding these rules can help investors account for potential tax consequences when making investment decisions. Investors with questions about how the wash-sale rule applies to their circumstances may want to consult a tax professional.

Avoiding a Wash Sale

The best way to avoid a wash sale is to understand how the rule applies to your transactions and keep track of purchases and sales across your accounts, whether you use a traditional brokerage or prefer online investing. The IRS generally considers a security a wash sale if you sell it at a loss and purchase or acquire the same or substantially identical security within 30 days before or after the sale.

Because the IRS does not provide a simple, universal definition of what makes two securities substantially identical, determining whether a particular transaction triggers a wash sale can be complicated. Investors who use tax-loss harvesting may want to review their transactions carefully and consult a tax professional when they’re unsure about a potential wash sale.

What to Do After Selling an Asset at a Loss

One straightforward way to avoid a wash sale is to wait at least 31 days after selling a security at a loss before purchasing the same or a substantially identical security.

Alternatively, an investor might choose to purchase a different security that provides similar, but not substantially identical, market exposure. However, determining whether two securities are substantially identical can be difficult, so investors may want to consult a tax professional before making the transaction.

Selling a security at a loss can potentially help investors offset capital gains and, subject to applicable limits, some ordinary income. However, if an investor wants to repurchase the same security shortly after selling it, the wash-sale rule may affect the timing or tax treatment of the transaction.

In some cases, selling stock in one corporation and purchasing stock in another corporation may not trigger a wash sale. Similarly, selling a company’s stock and purchasing its bonds may not trigger the rule. However, the tax treatment depends on the specific securities and transaction.

Investing in ETFs or Mutual Funds Instead

Investors who want to maintain exposure to a particular industry or market segment after selling a security at a loss may consider purchasing a different ETF or mutual fund.

For example, an investor who sells an individual technology stock at a loss might consider purchasing a diversified technology ETF. Because the fund holds multiple securities rather than just the stock that was sold, it may not be considered substantially identical to the individual stock. However, this is not a guarantee that the transaction will avoid a wash sale. The IRS considers whether securities are substantially identical, and the analysis depends on the specific investments involved.

Switching between two ETFs or mutual funds can also be complicated. Funds that track the same index or have nearly identical holdings may raise wash-sale concerns, even if they have different names or expense ratios.

Investors considering these transactions may want to review the funds’ underlying holdings and consult a tax professional before making a decision.

Wash-Sale Penalties and Benefits

If a transaction qualifies as a wash sale, the investor generally cannot deduct the disallowed loss immediately to reduce taxable income or offset capital gains. However, when a replacement security is purchased in a taxable account, the disallowed loss is generally added to its cost basis. This adjustment can defer the tax benefit until the replacement security is sold.

For example, suppose an investor purchases 10 shares of a stock for $1,000 and later sells them for $800, realizing a $200 loss. If the investor purchases 10 substantially identical shares for $850 within the wash-sale window, the $200 loss is disallowed.

The investor’s cost basis in the replacement shares becomes $1,050 ($850 purchase price + $200 disallowed loss). If the investor later sells the replacement shares for $1,200, the taxable capital gain would generally be $150 rather than $350, assuming no other adjustments apply.

The holding period of the original security is also generally added to the holding period of the replacement security. This may affect whether a future gain or loss is classified as short-term or long-term for tax purposes.

The treatment differs when the replacement security is purchased in an IRA or Roth IRA. In that case, the disallowed loss generally is not added to the IRA’s cost basis, so the tax benefit may be permanently lost.

The Takeaway

The wash-sale rule applies when an investor sells a stock or other security at a loss and buys or acquires the same or a substantially identical security within 30 days before or after the sale. The rule generally prevents investors from deducting the loss immediately, although the disallowed loss may be added to the cost basis of a replacement security in a taxable account.

Understanding the wash-sale rule can help investors account for potential tax consequences when selling securities at a loss. Because the rule can apply across multiple accounts and involves some uncertainty about what qualifies as substantially identical, investors may want to consult a tax professional when planning transactions.

Tax considerations are one part of managing an investment portfolio, and understanding how different transactions may affect a tax return can help investors make more informed decisions.

Invest in what matters most to you with SoFi Active Invest. In a self-directed account provided by SoFi Securities, you can trade stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, options, and more — all while paying $0 commission on every trade. Other fees may apply. Whether you want to trade after-hours or manage your portfolio using real-time stock insights and analyst ratings, you can invest your way in SoFi's easy-to-use mobile app.

Invest with as little as $5 with a SoFi Active Investing account.

Options involve substantial risk of loss and the possibility an investor may lose the entire amount invested. Before starting options trading, investors should be familiar with the Characteristics and Risks of Standardized Options . TTax implications with options should be considered. Consult your tax advisor to understand any impacts to your taxes.

FAQ

How do I avoid a wash sale?

To avoid a wash sale, you need to wait at least 31 days after selling a security at a loss before purchasing the same or a substantially identical security. You can also consider purchasing a different security that provides similar market exposure but is not substantially identical. Keep in mind that the wash-sale rule applies across relevant accounts, including taxable accounts and IRAs, and can also apply to purchases made by a spouse. Since wash-sale rules can be complicated, you may want to consult a tax professional.

What is the wash-sale rule in the IRS?

The IRS wash-sale rule generally prevents investors from deducting a loss on a security if they purchase or acquire the same or a substantially identical security within 30 days before or after selling it at a loss. The rule is intended to prevent investors from claiming tax deductions for losses while maintaining substantially the same investment position. In a taxable account, the disallowed loss is generally added to the cost basis of the replacement security.

What happens if I sell a wash-sale stock?

If you sell a stock at a loss and trigger the wash-sale rule, you generally cannot deduct the loss immediately on your tax return. If you purchase the replacement stock in a taxable account, the disallowed loss is typically added to its cost basis, which may reduce a future taxable gain or increase a future deductible loss. However, if you purchase the replacement security in an IRA or Roth IRA, the loss generally cannot be added to the account’s cost basis.

What is the downside of a wash sale?

The main downside of a wash sale is that you may not be able to deduct an investment loss when you expected to. In a taxable account, the tax benefit is generally deferred until you sell the replacement security. If you purchase a substantially identical security in an IRA or Roth IRA, the loss may be permanently disallowed. Wash sales can also complicate tax reporting and make it more difficult to plan transactions around tax-loss harvesting.

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This content is for educational and informational purposes only. The products, services, or features discussed may not currently be available via the SoFi platform. Any references to third-party products, services, or companies do not constitute an endorsement, recommendation, or solicitation by SoFi. Readers should independently evaluate their options and consider their individual financial needs and circumstances before making any decisions. ©2026 SoFi Technologies, Inc. All rights reserved.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOIN-Q426-082

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A rainy day fund is a pool of savings set aside to cover minor, unexpected expenses that fall outside your regular budget. Unlike a full-fledged emergency fund, which is designed to help you manage major financial disruptions, a rainy day fund covers smaller surprises — such as a flat tire, an unexpected vet bill, a broken household appliance, or an unplanned medical copay.

Having money set aside for these expenses can help you keep your budget on track, avoid high-interest debt, and handle financial surprises without dipping into other savings. Below, we take a closer look at what a rainy day fund is, how it differs from an emergency fund, and how to build and maintain one.

What Is a Rainy Day Fund?

A rainy day fund is a small, easily accessible cash reserve that you can use to pay for minor, unexpected expenses without disrupting your regular budget or going into debt. Unlike an emergency fund, which is intended to cover major financial disruptions such as job loss or a significant medical expense, a rainy day fund is designed for life’s smaller financial hiccups.

A rainy day fund often ranges from $500 to $2,500, although the right amount depends on your financial situation and the expenses you may need to cover. It’s generally kept in a liquid account, such as a high yield savings account, so you can access the money when needed.

Examples of a Rainy Day Fund

A rainy day fund can help you manage minor financial surprises without throwing off your monthly budget. Common examples of expenses it might cover include:

•   Car repairs: Replacing a flat tire or buying a new car battery.

•   Home repairs: Fixing a leaking pipe or repairing a broken washing machine.

•   Medical expenses: Paying an unexpected copay for an urgent care visit or a dental filling.

•   Pet care: Covering an unplanned vet visit for a minor illness.

•   Unexpected travel: Paying for a last-minute trip to visit a family member.

A rainy day fund can also help cover small, unplanned expenses that don’t fit neatly into your regular budget. However, predictable costs that occur periodically, such as annual subscriptions, holiday gifts, or routine car maintenance, may be better suited to a sinking fund. This type of savings fund lets you set aside money over time for expenses you know are coming, helping you prepare for them without dipping into your rainy day savings.

Rainy Day Funds Vs. Emergency Funds

Rainy day funds and emergency funds both provide a financial cushion, but they serve different purposes.

A rainy day fund is a smaller pool of savings intended for minor, unexpected expenses or budget snags that are likely to occur occasionally. You might use it to pay for a small car repair, replace a broken appliance, or cover an unexpected medical copay.

An emergency fund is a larger reserve designed to cover significant financial setbacks, such as losing your job, facing a major medical bill, or needing an expensive home repair. A common goal is to save three to six months’ worth of essential living expenses.

Here’s how the two types of savings compare:

	Rainy Day Fund	Emergency Fund
Target amount	Often $500 to $2,500	Typically three to six months of essential living expenses
Primary purpose	Cover minor, unexpected expenses	Cover major financial disruptions
Typical uses	Small car repairs, appliance fixes, unexpected copays	Job loss, major medical expenses, significant property damage
When to use it	When a relatively small, unplanned expense arises	When a major expense or loss of income threatens your financial stability

You don’t necessarily need to build both funds at once. If you have limited savings, you might start with a small rainy day fund while gradually working toward a larger emergency fund.

Recommended: Emergency Fund Calculator

Why Can’t I Use My Emergency Fund?

You can use your emergency fund to cover smaller, unexpected expenses. However, doing so repeatedly can reduce the amount available for a more serious financial setback.

For example, if you use your emergency fund to pay for every minor car repair or unexpected household expense, you may have less money available if you lose your job or face a major medical bill. Without enough savings to cover an emergency, you may need to rely on a credit card or personal loan. Depending on the interest rate and repayment terms, borrowing can make an already expensive situation even more costly.

You might also be tempted to withdraw money from retirement savings or funds earmarked for a child’s education, which could trigger taxes and penalties and reduce the money available for future needs.

Having a rainy day fund won’t eliminate every financial challenge, but it can give you another resource to draw on before turning to credit or other long-term savings.

How Much Money Should I Put in My Rainy Day Fund?

A rainy day fund often ranges from $500 to $2,500, but your savings goal should reflect your circumstances. Someone who owns a home and a car may face different unexpected expenses than someone who rents and relies on public transportation.

To estimate how much to save, make a list of the minor unexpected expenses you might face and how much they could cost. For example, you might want enough money to cover a car battery replacement, a small plumbing repair, or an unexpected vet bill. Reviewing your bank and credit card statements from the previous year can also help you identify expenses that caught you off guard.

You may also want to account for the possibility of two expenses occurring close together. If you have a $500 car repair and a $300 appliance repair in the same month, for instance, a $500 fund may not be enough to cover both.

Ideally, you’ll want to keep predictable expenses separate. Costs that occur periodically, such as routine car maintenance, annual subscriptions, back-to-school shopping, and holiday gifts, may be better suited to a sinking fund. It’s a good idea to estimate their annual cost and set aside money each month so you can pay those bills without dipping into your rainy day savings.

How Do I Save for a Rainy Day Fund?

Building a rainy day fund is similar to saving money for any other financial goal. You can choose one strategy or combine several to make progress.

•   Cut back on nonessential spending: Review your recent expenses to see where you could free up money. Cooking at home more often, canceling a streaming service you rarely use, or reducing clothing purchases could give you extra cash to put toward savings.

•   Bring in extra income: A side hustle, such as dog walking, babysitting, or freelance work, can help you build your fund. You could also sell items you no longer need and deposit the proceeds into savings.

•   Put windfalls toward savings: A tax refund, work bonus, or cash gift can give your rainy day fund a boost. Consider setting aside some or all of the money before spending it elsewhere.

•   Save your spare change: Collecting coins in a jar is a simple way to save a little at a time. You can also use a bank’s rounding-up feature, if available, to move small amounts into savings automatically.

Setting Up Automatic Transfers

One of the easiest ways to build your rainy day fund is to schedule automatic transfers from your checking account to a dedicated savings account. You could arrange a transfer for the day after payday so that a portion of your income goes toward savings before you spend it.

You might start with an amount that comfortably fits your budget, even if it’s just $10 or $25 per paycheck. Consistent contributions can add up over time, and you can increase the amount as your financial situation allows.

Utilizing Direct Deposit

If your employer offers split direct deposit, you may be able to send a portion of each paycheck directly into your rainy day savings account while depositing the rest into checking. This approach helps you save automatically without having to initiate transfers yourself.

For example, when you set up direct deposit, you might direct $25 from each biweekly paycheck into savings. That would add up to $650 over a year, before any interest earned, assuming 26 paychecks and no withdrawals.

If split direct deposit isn’t available, you can set up an automatic transfer from checking to savings instead. The key is to choose an amount and schedule you can maintain without making it difficult to cover your regular bills.

Recommended: Should You Pay Off Debt or Save?

Where Should I Keep My Rainy Day Fund?

Ideally, you want to keep your rainy day fund in an account that’s separate from your everyday spending money but still easy to access. A high-yield savings account can be a good option because it may earn more interest than a traditional savings account while keeping your money readily available. Compare account fees, minimum balance requirements, and withdrawal options before opening one.

If your bank offers savings vaults or subaccounts, you may be able to use these features to organize your money without opening multiple accounts. For example, you could create one vault for rainy day expenses and another for your emergency fund. This can make it easier to track each savings goal separately.

A money market account (MMA) is another option. It may offer competitive interest rates along with checks and a debit card for convenient access to your money, though features, fees, and minimum balance requirements vary by bank.

Whichever option you choose, it’s important to prioritize easy access, low fees, and deposit protection. Savings accounts and MMAs at FDIC-insured banks are generally insured up to applicable limits. If you use a credit union, check whether it has coverage through the National Credit Union Administration (NCUA).

The Takeaway

A rainy day fund can help you cover minor, unexpected expenses without disrupting your budget or relying on credit. To create one, start with a savings goal that fits your circumstances, contribute regularly, and keep the money in an accessible savings account. When you use the fund, it’s important to replenish it as your budget allows so you’ll be better prepared for the next unexpected expense. Over time, even small contributions can provide a useful financial cushion.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

Better banking is here with SoFi, named the #1 Bank in the U.S. for the fourth year in a row by Forbes (2026).* Enjoy up to 3.30% APY on SoFi Checking and Savings.

FAQ

What is considered a rainy day fund?

A rainy day fund is a pool of savings set aside for minor, unexpected expenses, such as a small car repair, an unplanned vet bill, or a broken appliance. It typically ranges from $500 to $2,500, depending on your financial situation and potential expenses. Unlike an emergency fund, which is designed for major financial setbacks, a rainy day fund helps you handle smaller costs without disrupting your budget or taking on debt.

Can state governments also have rainy day funds?

Yes. State governments can establish rainy day funds to help manage budget shortfalls during economic downturns or periods of reduced tax revenue. These reserves can help states maintain essential services without immediately raising taxes, cutting spending, or borrowing money. Like a personal rainy day fund, a government reserve provides a financial cushion for unexpected challenges, although the amounts involved and the rules governing when the money can be used vary by state.

Should I prioritize a rainy day fund over paying off debt?

It depends on your financial situation. Building a small rainy day fund while making at least the minimum payments on your debts can help you cover unexpected expenses without borrowing more. If you have high-interest debt, such as credit card balances, directing extra money toward repayment may save you more in interest than building a larger cash reserve. Once you have a basic savings cushion, you can balance additional savings with debt repayment based on your expenses, interest rates, and financial goals.

How do I replenish my rainy day fund after using it?

After using your rainy day fund, you’ll want to review your budget to determine how much you can comfortably set aside each month. You might set up automatic transfers from checking to savings, direct part of any bonus or tax refund toward the fund, or temporarily reduce nonessential spending. You don’t necessarily have to replace the entire amount immediately. Consistent contributions can help rebuild your savings over time while allowing you to keep up with regular bills and other financial priorities.

Is a rainy day fund different from a sinking fund?

Yes. A rainy day fund generally covers minor, unexpected expenses, while a sinking fund helps you save for a known expense in the future. For example, you might use a rainy day fund to pay for an unexpected appliance repair and a sinking fund to save for holiday gifts, an annual insurance premium, or a planned vacation. With a sinking fund, you typically estimate the cost in advance and contribute regularly until you have enough to cover the expense.

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