What is Wash Sale Rule?
The wash sale rule prohibits claiming a tax loss on a security if you buy a substantially identical security within 30 days before or after the sale. The disallowed loss is added to the new position's cost basis.
Wash Sale Rule Explained
This IRS rule prevents traders from harvesting tax losses while maintaining their market position. If you sell a stock at a loss and repurchase it within the 30-day window (including the period before the sale), the loss is disallowed. This applies to options on the same stock as well. Traders need to track wash sales carefully, especially active traders who trade the same stocks frequently.
Real-World Example
You sell 100 shares of AAPL at a $2,000 loss on January 15. On January 25, you buy 100 shares of AAPL again. The wash sale rule disallows your $2,000 loss for tax purposes. Instead, the $2,000 is added to your new AAPL position's cost basis.
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