What Is the Wash-Sale Rule?

By Laurel Tincher · May 26, 2023 · 6 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

What Is the Wash-Sale Rule?

A wash sale occurs when an investor sells a security at a loss, and buys a very similar security within a 30-day window of the sale (30 days before or after). The wash-sale rule is an Internal Revenue Service (IRS) regulation that states an investor can’t receive tax deduction benefits if they sell an investment for a loss, then purchase the same or a “substantially identical” asset within 30 days before or after the sale.

While investors may find themselves in a position in which it may be beneficial to sell securities to harvest losses, it’s important to know the wash-sale rule in and out to avoid triggering penalties.

Which Investments are Subject to the Wash-Sale Rule?

The wash-sale rule applies to most common investments, including:

•   Stocks

•   Bonds

•   Mutual funds

•   Options

•   Exchange-traded funds (ETFs)

•   Stock futures contracts

Transactions in an individual retirement account (IRA) can also fall under the wash-sale rule. The wash-sale rule does not apply to commodity futures or foreign currency trades. The rule also applies if an investor sells a security that has increased in value and within 30 days buys an identical security. They will need to pay capital gains taxes on the proceeds.

What Happens When You Trigger a Wash Sale?

Investors commonly choose to sell assets at a loss as part of their tax or day trading strategy, or they may regret selling an asset while the market was down, and decide to buy back in.

The intent of the wash-sale rule is to prevent investors from abusing the tax benefits of selling at a loss, and claiming artificial losses.

In the event that an investor does trigger a wash sale, they will not be allowed to write off the loss when they do their tax reporting to the IRS. This means the investor won’t receive any tax benefit for selling at a loss. The rule still applies if an investor sells an investment in a taxable account and buys it back in a tax-advantaged account, or if one spouse sells an asset and then the other spouse purchases it that also counts as a wash sale.

It’s important for investors to understand the wash-sale rule so that they account for it in their investment and tax strategy. If investors have specific questions, they might want to ask their tax advisor for help.

Recommended: Investing 101 for Beginners

Avoiding a Wash Sale

Unfortunately, the guidelines regarding what a “substantially identical” security is are not very specific. The easiest way to avoid wash sales is to create a long-term investing strategy involving few asset sales and not trying to time the market. Creating a diversified portfolio is generally a good strategy for investors.

Another important thing to keep in mind is the wash-sale rule applies across an investor’s accounts. As such, investors need to keep track of their sales and purchases across their entire portfolio to try and make sure that the wash-sale rule doesn’t affect any investment choices.

What to Do After Selling an Asset at a Loss

The safest option is to wait more than 30 days to purchase an asset after selling a similar one at a loss. An investor can also invest funds into a different asset–a different enough asset, that is–for 30 days or more and then move the funds back into the original security after the wash sale window has passed.

There are benefits to selling an asset at either a profit or a loss. If an investor sells at a profit, they make money. If they sell at a loss, they can declare it on their taxes to help offset their capital gains or income. If an investor has significant capital gains to report, they may decide to sell an asset that has decreased in value to help lower their tax bill. However, if they hoped to reinvest in an asset later, a wash sale can ruin those plans.

In some cases, simply selling a stock from one corporation and purchasing one from another, different corporation is fine. Even selling a stock and buying a bond from the same company may not trigger a wash sale.

Investing in ETFs or Mutual Funds Instead

If an investor wants to reinvest funds in a similar industry while avoiding a wash sale, one option would be to switch to an ETF or mutual fund. There are ETFs and mutual funds made up of investments in particular industries, but they are often diversified enough that they wouldn’t be considered to be too similar to an individual stock or bond. It’s possible that an investor could sell an individual stock and reinvest the money into a mutual fund or ETF within a similar market segment without violating the wash-sale rule.

However, if an investor wants to sell an ETF and buy another ETF, or switch to a mutual fund, this can be more challenging. It may be difficult to figure out which ETF or mutual fund swaps will count as wash sales, and which won’t.

Wash-Sale Penalties and Benefits

If the IRS decides that a transaction counts as a wash sale, the investor can’t use the loss to reduce their taxable income or offset capital gains on their taxes for that year.

However, there can be an upside to wash sales. Investors can end up with a higher cost basis for their new investment, because the loss from the sale is added to the cost basis of the new purchase. In addition, the holding period of the sold investment is added to the holding period of the new investment.

The benefit of having a higher cost basis is that an investor can choose to sell the new investment at a loss and have a greater loss for tax reporting than they would have. Conversely, if the investment increases in value and the investor sells, they will have a smaller capital gain to report. Having a longer holding period means an investor may be able to pay long-term capital gains taxes on a sale rather than short-term gains, which have a higher rate.

The Takeaway

The wash-sale rule is triggered when an investor sells a security at a loss, but then turns around and buys a similar security within 30 days–either before, or after. It’s a bit of an opaque rule, but there can be consequences for triggering wash sales. That’s why understanding regulations like the wash-sale rule is an important part of being an informed investor.

Part of making solid investing decisions is planning for taxes and understanding what the benefits and downsides may be for any particular transaction. This is just one aspect of tax-efficient investing that investors might want to consider.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

SoFi Invest®
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $25 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender