Executive Summary
What is Wash Sale Rules and Equity Compensation: What You Need to Know?
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Wash Sale Rules Overview
The wash sale rule under Internal Revenue Code (IRC) § 1091 disallows a capital loss deduction if substantially identical securities are purchased within 30 days before or after the loss sale date, creating a 61-day window (30 days prior, sale day, 30 days after).[1][3][4] This rule applies to stocks, securities, contracts, options, and short sales, but not cryptocurrencies, and spans all taxpayer accounts including IRAs and spouses'.[4][5]
Key authoritative sources:
- IRC § 1091
- Treas. Reg. § 1.1091-1
- IRS Publication 550 (Investment Income and Expenses)
- Instructions for Form 1099-B
Core Mechanics from IRS Rules
Per IRC § 1091(a), no deduction is allowed for losses from securities sales if the taxpayer acquires (or has a contract/acquired right to acquire) substantially identical stock or securities within the 61-day period.[1][5] "Substantially identical" is facts-and-circumstances based (e.g., same issuer's common vs. preferred stock may qualify if economically similar; ETFs or debt securities require economic difference analysis).[6][7]
- Timeline: 30 days before sale + sale date + 30 days after = 61 days total. Example: Sell April 15; avoid repurchases March 16–May 15.[1][3]
- Reporting: Brokers report wash sales on Form 1099-B (same CUSIP, same account); taxpayers must track and adjust across accounts on Form 8949 and Schedule D.[4][5][9]
- Exceptions (per Instructions for Form 1099-B): No wash sale if purchased security transfers to another account before adjustment, or certain other transfers.[9]
Disallowed loss adds to the replacement shares' basis; original holding period tacks on to new shares.[4]
Example Calculation (from multiple sources, aligned with IRS Pub. 550):
Footnotes
Primary Sources
| Source | Type | URL |
|---|---|---|
| IRC § 1091 | Reference | https://www.law.cornell.edu/uscode/text/26/1091 |
| Treas. Reg. § 1.1091-1 | Reference | https://www.law.cornell.edu/cfr/text/26/1.1091-1 |
| IRS Publication 550 (Investment Income and Expenses) | Reference | https://www.irs.gov/publications/p550 |
| Instructions for Form 1099-B | Reference | https://www.irs.gov/pub/irs-pdf/i1099b.pdf |
| Treas. Reg. §1.83-2 | Reference | https://www.law.cornell.edu/cfr/text/26/1.83-2 |
Disclaimer: This guide discusses legal tax optimization strategies only. Tax evasion is illegal and is never recommended. This content is for educational purposes and does not constitute tax, legal, or financial advice. Tax laws vary by jurisdiction and change frequently. Always consult a qualified tax professional (CPA, tax attorney, enrolled agent) before making decisions based on this information. The authors accept no liability for actions taken based on this content.