The wash sale rule is an Internal Revenue Service (IRS) regulation that prevents investors from claiming a capital loss on their taxes when they sell a security at a loss and then buy the same security within 30 days. The rule is designed to prevent investors from taking advantage of the tax benefits of losses without actually reducing their investment exposure.
The wash sale rule applies to both stocks and mutual funds. When an investor sells a security at a loss and then buys the same security within 30 days, the IRS considers the sale a “wash sale” and disallows the capital loss deduction. The wash sale rule applies to both the purchase and sale of the security, so if an investor buys a security and then sells it within 30 days, the loss is also disallowed.
The wash sale rule applies to both taxable and tax-deferred accounts. In a taxable account, the disallowed loss is added to the cost basis of the security purchased in the wash sale. In a tax-deferred account, the disallowed loss is not added to the cost basis of the security purchased in the wash sale.
The wash sale rule does not apply to gains. If an investor sells a security at a gain and then buys the same security within 30 days, the gain is not disallowed.
The wash sale rule is an important consideration for investors who are looking to take advantage of tax benefits. It is important to understand the rule and how it applies to your investments in order to ensure that you are not inadvertently violating the rule and losing out on potential tax savings.
