Wash Sale Rule

What is the Wash Sale Rule?

Wash Sale Rule is a regulation laid down by the internal revenue system (IRS) of the United States to disallow a tax deduction when an investor sells the security at a loss and then buys the same or identical security from the market within a period of 30 days, thus rebuilding his position and also taking a tax benefit on the capital loss suffered.

The period of the wash sale rule is actually 61 days, which starts from 30 days before the stock or the bond has been purchased and 30 days after the stock or the bond has been sold in the market. Hence if you want to book a loss in your tax return merely by selling the security, you need to keep close attention on the dates of buy and sell of the security since it will affect the taxation system.


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Examples of Wash Sale Rule

Example #1

Let us say Mr.A buys 1000 Shares of Apple on January 01, 2019, amounting to Rs $50,000 ay $50 per share. On January 08, 2019, the price of the shares fell to $40, thus reflecting a notional loss of $10,000 for Mr.A. Now he sells the Stock in panic immediately and buys backs the same on January 20, 2019, thus rebuilding his earlier position and also booking a loss in his return of income to the IRS.

In this case, this transaction would be considered a wash sale because Mr.A has sold the stock and bought it back before the expiry of 30 days from the date of sale. IRS will disallow the capital loss, and the same will be added back to the cost of acquisition on January 20, 2019.

Example #2

Suppose Mr.A bought 1000 shares of Google at $100 on January 15, 2019. He sold the same on January 31, 2019, and again purchases on March 01, 2019. In this case, there is absolutely no problem with the buyback date since it is after 30 days from the sale date. However, Mr.A has originally bought the shares on January 15, 2019, and sold the same before the expiry of 30 days.

In this case, also wash sale rule will be applicable, and the loss booked as a capital loss will be disallowed in the tax return of income for that year.

Example #3

Mr.A buys a bond on January 01, 2019, sells it on March 01, 2019, and repurchases the same on May 01, 2019; in this case, there will be no applicability of the wash sale rule since the 30 days condition for the sale and repurchase of the bond has already been taken care and the capital loss if any of the security sold will not be disallowed as a deduction in the return of income for that calendar year.


Below are some of the Advantages :



Wash Sale Rule is one of the debatable topics in the tax structure since it has many loopholes in it regarding the dates, re-purchase of identical securities. This rule is not applicable in India; however, in the US, it is more stringent.

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