But you also don’t get to claim capital losses until you sell your stock. Even if the share price plunges, you won’t get to take a tax loss until you sell.
What lawmakers realized, though, was that there’s potential for some tax trickery. If you sell a stock to claim a loss but then immediately buy it back, then from an economic standpoint, it’s almost as if you’d never sold it at all. Tax officials wanted to avoid that gamesmanship, so they created the wash sale rules.
The wash sale rules, explained
The most basic aspects of the wash sale rules are simple to understand. If you sell a stock or other investment at a loss and then buy it back within 30 days of the sale, then your capital loss will be disallowed. Instead, the loss will be wrapped into the tax basis for the newly purchased shares.
Plenty of investors have tried to get around the wash sale rules with more complex transactions. However, the rules generally prohibit those workarounds as well. Consider:
- If you buy shares of stock within 30 days before you sell your original losing shares, then the wash sale rules will also prevent you from claiming a loss. That prevents you from temporarily doubling up on your position before selling.
- If you buy an option to purchase the same stock you just sold, it triggers the wash sale rules the same way buying the shares outright would.
- If you sell the stock in your regular brokerage account but buy it back in your IRA, the wash sale rules still disallow the loss.
- If you buy shares of a “substantially identical stock” after selling, wash sale rules can also apply. This would likely be the case with a company that has two classes of common stock.