A wash sale has occurred if an investment is sold for a loss and is then replaced with the same or substantially identical investment within 30 days before or after the sale. Losses on a wash sale are disallowed. The loss is instead added to the cost basis of the new investment.
See other definitions here: tax terms for individuals; tax terms for business owners
Wash Sale Example
For example, if you own 100 shares of stock that have gone down in value, you can sell the shares and claim the loss on your tax return. This is subject to the limit on deduction of capital losses, of course. However, you may have also determined that you want to remain invested in this particular stock, and therefore you buy back 100 shares of the same or substantially identical stock. If the new purchase is made within 30 days before or after selling the original shares at a loss, the wash sale rule applies. This means that the loss cannot be claimed on your tax return. The loss is instead added to the cost basis of the new shares. This effectively defers your loss on the sales of shares to the point in time in the future when you sell the remaining shares.
|Activity||Date||Amount||Cost Basis||Potential Loss|
|Original Purchase||Jan 1||100 shares of Zed Inc @ $50||$5000|
|Sell Original Shares||Jul 20||100 shares of Zed Inc @ $40||$4000||$1000|
|New Purchase||Aug 1||100 shares of Zed Inc @ $40||$4000|
The $1000 wash sale rule is triggered in this example because the new shares were purchased only 10 days after selling the substantially identical shares. The loss is disallowed and the cost basis of the new purchase is now $5000 ($4000 + $1000).