12
Wash-Sale Rule: What It Is, How It Works
You’re our first priority.
Every time.
NerdWallet, Inc. is an independent publisher and comparison service, not an investment advisor. Its articles, interactive tools and other content are provided to you for free, as self-help tools and for informational purposes only. They are not intended to provide investment advice. NerdWallet does not and cannot guarantee the accuracy or applicability of any information in regard to your individual circumstances. Examples are hypothetical, and we encourage you to seek personalized advice from qualified professionals regarding specific investment issues. Our estimates are based on past market performance, and past performance is not a guarantee of future performance.
We believe everyone should be able to make financial decisions with confidence. And while our site doesn’t feature every company or financial product available on the market, we’re proud that the guidance we offer, the information we provide and the tools we create are objective, independent, straightforward — and free.
So how do we make money? Our partners compensate us. This may influence which products we review and write about (and where those products appear on the site), but it in no way affects our recommendations or advice, which are grounded in thousands of hours of research. Our partners cannot pay us to guarantee favorable reviews of their products or services. Here is a list of our partners.
Wash-Sale Rule: What It Is, How It Works
Selling assets at a loss can be beneficial from a tax perspective, but be careful to avoid the wash-sale rule.
Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website. However, this does not influence our evaluations. Our opinions are our own. Here is a list of our partners and here's how we make money.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
Updated · 5 min readHow is this page expert verified?
NerdWallet's content is fact-checked for accuracy, timeliness and relevance. It undergoes a thorough review process involving writers and editors to ensure the information is as clear and complete as possible.
More on our editorial rigor
Writer
Expertise Personal Finance investing retirementConnor Emmert is a former NerdWallet writer and an authority on investing. Prior to joining NerdWallet, he spent several years as a licensed financial advisor with Bank of America/Merrill Lynch and Fisher Investments. He earned his bachelor's degree in English at Colby College.
Connor Emmert is a former NerdWallet writer and an authority on investing. Prior to joining NerdWallet, he spent several years as a licensed financial advisor with Bank of America/Merrill Lynch and Fisher Investments. He earned his bachelor's degree in English at Colby College. Writer + more + more
Head of Content, New Verticals
11 years of experienceChris Hutchison helped build NerdWallet's editorial operation and has directed coverage across banking, investing, taxes and insurance. He now leads a team exploring new verticals. Before joining NerdWallet, he was an editor and programmer at ESPN and an editor at the San Jose Mercury News.
Chris Hutchison helped build NerdWallet's editorial operation and has directed coverage across banking, investing, taxes and insurance. He now leads a team exploring new verticals. Before joining NerdWallet, he was an editor and programmer at ESPN and an editor at the San Jose Mercury News. Head of Content, New Verticals + more + more
Lead Writer/Spokesperson
Expertise Cryptocurrency investing alternative assets taxesAndy Rosen is a former NerdWallet writer who covered taxes, cryptocurrency investing and alternative assets. He has more than 15 years of experience as a reporter and editor covering business, government, law enforcement and the intersection between money and ideas. In these roles, Andy has seen cryptocurrency develop from an experimental dark-web technology into an accepted part of the global financial system. He is based in Boston.
Andy Rosen is a former NerdWallet writer who covered taxes, cryptocurrency investing and alternative assets. He has more than 15 years of experience as a reporter and editor covering business, government, law enforcement and the intersection between money and ideas. In these roles, Andy has seen cryptocurrency develop from an experimental dark-web technology into an accepted part of the global financial system. He is based in Boston. Published in Lead Writer/Spokesperson + more + more Nerdy takeawaysThe wash-sale rule prevents you from deducting losses from transactions that are quickly reversed.
While securities are subject to the wash-sale rule, cryptocurrency is not — for now.
You may be able to avoid a wash sale by buying an ETF covering the industry you're interested in.
What is the wash-sale rule?
What is the wash-sale rule?The wash-sale rule is a tax requirement that prevents investors from selling assets at a loss and then immediately buying them back in order to pocket a quick tax write-off.
The wash-sale rule is a tax requirement that prevents investors from selling assets at a loss and then immediately buying them back in order to pocket a quick tax write-off.Brokerage firms
Brokerage firms
Brokerage firmson Charles Schwab's website
on E*TRADE's website
on Vanguard's website
on Fidelity's website
How does a wash sale work?
How does a wash sale work?The IRS defines a wash sale as a set of transactions in which you sell a security in a taxable account and repurchase the same or a “substantially identical” security within 30 days before or after the sale.
The IRS defines a wash sale as a set of transactions in which you sell a security in a taxable account and repurchase the same or a “substantially identical” security within 30 days before or after the sale. Internal Revenue Service. Publication 550, Investment Income and Expenses. Accessed Aug 18, 2025.Wash-sale rules cover stocks, bonds, mutual funds, exchange-traded funds, and options sold in a taxable account.
Wash-sale rules cover stocks, bonds, mutual funds, exchange-traded funds, and options sold in a taxable account.The IRS will consider transactions a wash sale if you repurchase the security in a different account, including an IRA or Roth IRA — even if the other account is in your spouse’s name.
The IRS will consider transactions a wash sale if you repurchase the security in a different account, including an IRA or Roth IRA — even if the other account is in your spouse’s name.The wash-sale rule keeps investors from selling assets at a loss for the sole purpose of getting tax benefits. If the wash-sale rule did not exist, you could hypothetically sell assets any time they lost money and repurchase them the same day to capture capital losses without ever losing exposure to that investment.
The wash-sale rule keeps investors from selling assets at a loss for the sole purpose of getting tax benefits. If the wash-sale rule did not exist, you could hypothetically sell assets any time they lost money and repurchase them the same day to capture capital losses without ever losing exposure to that investment.The idea is that by buying and selling so quickly, your investment is basically a "wash," and so the losses from the one transaction don't truly reflect the state of your portfolio.
The idea is that by buying and selling so quickly, your investment is basically a "wash," and so the losses from the one transaction don't truly reflect the state of your portfolio.» Need a financial advisor? See our roundup of the best financial advisors
» Need a financial advisor? » Need a financial advisor? » Need a financial advisor? See our roundup of the best financial advisorsIn order to understand the wash-sale rule, it helps to understand the basics of capital gains taxes and the strategies investors can (and can't) use to manage them.
In order to understand the wash-sale rule, it helps to understand the basics of capital gains taxes and the strategies investors can (and can't) use to manage them.When you sell an investment for more than you paid for it, that's called a capital gain. If you sell an investment for less than you paid for it, that's called a capital loss.
When you sell an investment for more than you paid for it, that's called a capital gain. If you sell an investment for less than you paid for it, that's called a capital loss.Capital gains are income for tax purposes. The capital gains tax rate you pay on capital gains depends on your total taxable income, your tax-filing status and how long you held the investment.
Capital gains are income for tax purposes. The capital gains tax rate you pay on capital gains depends on your total taxable income, your tax-filing status and how long you held the investment.One tax-reduction strategy is to tally your gains and losses, and then use the losses to offset the gains. This is called tax-loss harvesting.
One tax-reduction strategy is to tally your gains and losses, and then use the losses to offset the gains. This is called tax-loss harvesting .If you have more losses than gains, you’re allowed to use up to $3,000 of losses per year to offset taxable income, thus reducing your taxes.
If you have more losses than gains, you’re allowed to use up to $3,000 of losses per year to offset taxable income, thus reducing your taxes.One of the few upsides of owning an investment that has lost money is that if you sell it for a loss, you can take advantage of a tax benefit.
One of the few upsides of owning an investment that has lost money is that if you sell it for a loss, you can take advantage of a tax benefit.Wash-sale consequences
Wash-sale consequencesLet's be clear, quick stock trades are allowed. There's nothing preventing you from selling a stock, deciding you made a mistake, and buying it again a few days later. It just means you can't use the loss to get a tax benefit.
Let's be clear, quick stock trades are allowed. There's nothing preventing you from selling a stock, deciding you made a mistake, and buying it again a few days later. It just means you can't use the loss to get a tax benefit.If you’re involved in a transaction that is identified as a wash sale, any disallowed loss will be added to your cost basis for the new security. You'll see how this works in the example below.
If you’re involved in a transaction that is identified as a wash sale, any disallowed loss will be added to your cost basis for the new security. You'll see how this works in the example below.Wash sale example
Wash sale exampleSay you purchased 20 shares of XYZ stock two years ago for $50 per share ($1,000 total).
Say you purchased 20 shares of XYZ stock two years ago for $50 per share ($1,000 total).Today, the price of XYZ dipped to $10 per share, meaning your holding dropped from $1,000 to $200. You sell all 20 shares of XYZ and realize an $800 loss.
Today, the price of XYZ dipped to $10 per share, meaning your holding dropped from $1,000 to $200. You sell all 20 shares of XYZ and realize an $800 loss.At the end of the year, you apply your $800 loss against capital gains you made elsewhere in your portfolio during the year. This reduces your tax bill.
At the end of the year, you apply your $800 loss against capital gains you made elsewhere in your portfolio during the year. This reduces your tax bill.Now, two weeks after selling your shares, the price of XYZ rises to $20 per share. You decide to buy 20 shares for $400.
Now, two weeks after selling your shares, the price of XYZ rises to $20 per share. You decide to buy 20 shares for $400.Because you purchased substantially identical shares (it's the same company) within 30 days of the sale, the IRS considers this a wash sale, which means you cannot apply your $800 capital loss against your capital gains taxes for the year.
Because you purchased substantially identical shares (it's the same company) within 30 days of the sale, the IRS considers this a wash sale, which means you cannot apply your $800 capital loss against your capital gains taxes for the year.Because your $800 loss is disallowed due to a wash sale, the disallowed loss is added to the price of your new shares to determine your cost basis for the new shares. In short: $400 + $800 = $1,200.
Because your $800 loss is disallowed due to a wash sale, the disallowed loss is added to the price of your new shares to determine your cost basis for the new shares. In short: $400 + $800 = $1,200. ? Nerdy TipA higher cost-basis may wind up saving you on taxes later. If you make a profit, the taxable gain will be smaller. And if you have a loss down the road, it could wind up netting you a larger tax deduction.
A higher cost-basis may wind up saving you on taxes later. If you make a profit, the taxable gain will be smaller. And if you have a loss down the road, it could wind up netting you a larger tax deduction.What makes wash-sale investments 'substantially identical'?
What makes wash-sale investments 'substantially identical'?Generally speaking, stocks or securities of one company are not substantially identical to stocks or securities of a separate company, even if they operate in the same sector.
Generally speaking, stocks or securities of one company are not substantially identical to stocks or securities of a separate company, even if they operate in the same sector.However, there are a few exceptions.
However, there are a few exceptions.If two companies merge, stock from the old and new company may be considered substantially identical.
If two companies merge, stock from the old and new company may be considered substantially identical.Shares of preferred stock are typically not considered substantially identical to shares of common stock of the same company. However, if the preferred stock is convertible to shares of common stock in the same company, there are some cases where the IRS would consider the preferred and common stock substantially identical.
Shares of preferred stock are typically not considered substantially identical to shares of common stock of the same company. However, if the preferred stock is convertible to shares of common stock in the same company, there are some cases where the IRS would consider the preferred and common stock substantially identical.Things get a more complicated with pooled investment securities such as mutual funds or exchange-traded funds. The complexity lies in the nature of a pooled investment itself (each fund can hold shares of hundreds of individual companies), as well as in the lack of specific IRS guidance.
Things get a more complicated with pooled investment securities such as mutual funds or exchange-traded funds. The complexity lies in the nature of a pooled investment itself (each fund can hold shares of hundreds of individual companies), as well as in the lack of specific IRS guidance.Two mutual funds may or may not be considered “substantially identical” enough to trigger a wash sale. Each has a fund manager actively choosing what to buy and sell, which could provide enough variation to avoid being considered substantially identical.
Two mutual funds may or may not be considered “substantially identical” enough to trigger a wash sale. Each has a fund manager actively choosing what to buy and sell, which could provide enough variation to avoid being considered substantially identical.ETFs are slightly different in that most are passively managed vehicles. Instead of having a fund manager make portfolio decisions, ETFs generally track a market index such as the S&P 500 or Russell 1000. Two ETFs tracking the same market index will have very similar compositions, so it can be difficult to determine whether they are substantially identical and in violation of the wash-sale rules. Again, the IRS guidance here lacks specifics
ETFs are slightly different in that most are passively managed vehicles. Instead of having a fund manager make portfolio decisions, ETFs generally track a market index such as the S&P 500 or Russell 1000. Two ETFs tracking the same market index will have very similar compositions, so it can be difficult to determine whether they are substantially identical and in violation of the wash-sale rules. Again, the IRS guidance here lacks specifics Morningstar. Wash Sale Challenge: What Is Substantially Identical?. Accessed Aug 18, 2025. .» MORE: Where to Find Cheap or Free Financial Advice
» MORE: » MORE: » MORE: Where to Find Cheap or Free Financial AdviceHow to avoid a wash sale
How to avoid a wash saleThere are a few ways to lock in some losses without waiting 30 days to reinvest.
There are a few ways to lock in some losses without waiting 30 days to reinvest.Sell a stock and then buy an ETF
Sell a stock and then buy an ETFOne way to maintain some exposure after selling a company's stock is to purchase an exchange-traded fund (ETF) in a similar market sector. That way, if the whole sector bounces back, you’ll be able to take advantage of some market movement while still hanging on to your capital loss.
One way to maintain some exposure after selling a company's stock is to purchase an exchange-traded fund (ETF) in a similar market sector. That way, if the whole sector bounces back, you’ll be able to take advantage of some market movement while still hanging on to your capital loss.For example, say you own stock in a large technology company that hasn’t performed well this year. You’d like to harvest some losses, but you’d like to maintain your exposure to the technology sector without waiting 30 days to repurchase your stock. In that case, you might purchase an ETF or mutual fund that's focused on large technology companies. This might allow you to maintain your exposure without creating a wash sale.
For example, say you own stock in a large technology company that hasn’t performed well this year. You’d like to harvest some losses, but you’d like to maintain your exposure to the technology sector without waiting 30 days to repurchase your stock. In that case, you might purchase an ETF or mutual fund that's focused on large technology companies. This might allow you to maintain your exposure without creating a wash sale.Invest in a different index
Invest in a different indexETFs from different issuers that track the same market index may or may not be similar enough to be "substantially identical" and trigger a wash sale. One way to try to steer clear of a wash sale might be to pair funds with similar exposures that track different indexes. For example, if you sold an S&P 500-indexed ETF to realize losses, purchasing an ETF that tracks the Dow Jones or Russell 1000 could maintain your market exposure while decreasing the chances that you trigger a wash sale.
ETFs from different issuers that track the same market index may or may not be similar enough to be "substantially identical" and trigger a wash sale. One way to try to steer clear of a wash sale might be to pair funds with similar exposures that track different indexes. For example, if you sold an S&P 500 -indexed ETF to realize losses, purchasing an ETF that tracks the Dow Jones or Russell 1000 could maintain your market exposure while decreasing the chances that you trigger a wash sale.Because of the IRS’s nonspecific use of "substantially identical" and the gray areas around mutual funds and ETFs, consider talking with a financial advisor or tax advisor in order to avoid a costly mistake before harvesting any losses.
Because of the IRS’s nonspecific use of "substantially identical" and the gray areas around mutual funds and ETFs, consider talking with a financial advisor or tax advisor in order to avoid a costly mistake before harvesting any losses.» MORE: Do you need a financial advisor? Take our quiz to find out
» MORE: » MORE: » MORE: Do you need a financial advisor? Take our quiz to find out Advertisement1
Answer a few simple questions
2
Get a recommended match
3
Start achieving your money goals
What's your financial priority?
Financial Planning Retirement Planning Investment Management Tax Strategy OtherIs cryptocurrency subject to the wash-sale rule?
Is cryptocurrency subject to the wash-sale rule?The wash-sale rule does not apply to cryptocurrency. However, the rules around digital assets are unsettled, so it helps to be on the lookout for regulatory changes
The wash-sale rule does not apply to cryptocurrency. However, the rules around digital assets are unsettled, so it helps to be on the lookout for regulatory changes Intuit. What is the wash sale rule for cryptocurrency?. .While the IRS considers crypto to be property, and therefore subject to capital gains taxes, it is not broadly considered a security
While the IRS considers crypto to be property, and therefore subject to capital gains taxes, it is not broadly considered a security Stanford Journal of Blockchain Law & Policy. Taxation and Planning for DeFi Liquidity Providers: Redefining Taxable Events in Liquidity Pools. Accessed Aug 19, 2025. .That definition is being hotly debated in courts and among legislators, but for now crypto is not treated the same way as stocks and other securities from a wash-sale perspective.
That definition is being hotly debated in courts and among legislators, but for now crypto is not treated the same way as stocks and other securities from a wash-sale perspective.ON THIS PAGE
What is the wash-sale rule? What is the wash-sale rule? How does a wash sale work? How does a wash sale work? Wash-sale consequences Wash-sale consequences What makes wash-sale investments 'substantially identical'? What makes wash-sale investments 'substantially identical'? How to avoid a wash sale How to avoid a wash sale Is cryptocurrency subject to the wash-sale rule? Is cryptocurrency subject to the wash-sale rule?ON THIS PAGE
What is the wash-sale rule? What is the wash-sale rule? How does a wash sale work? How does a wash sale work? Wash-sale consequences Wash-sale consequences What makes wash-sale investments 'substantially identical'? What makes wash-sale investments 'substantially identical'? How to avoid a wash sale How to avoid a wash sale Is cryptocurrency subject to the wash-sale rule? Is cryptocurrency subject to the wash-sale rule? More like this Investment Basics Investing Stocks How Much Does a Financial Advisor Cost? Most financial advisors charge based on how much money they manage for you. Fees are typically 1% a year but can be lower. 2 By Andrea Coombes, Taryn Phaneuf Do You Need a Financial Advisor? 7 Ways to Tell You may need a financial advisor if you're facing big life changes, don't have financial goals, have complex compensation, high tax bills or for other reasons. Taryn Phaneuf How to Find Cheap or Free Financial Advice Quality financial advice is more accessible than ever — and much of it is free or inexpensive. Here's how to get it. Anna-Louise Jackson 3 Steps to Prepare for Your First Financial Advisor Meeting Here's what think about and bring to your first meeting with a financial advisor. June Sham