There's nothing illegal about wash sales. With the one exception of wash sales in an IRA, you don't even lose the capital loss. In a wash sale, it gets added onto the cost basis of the substantially identical asset, so you can potentially claim it on your taxes in the future.
Some investors may think that they can reverse the order of a wash sale, buying more of the asset before they later sell less than 30 days later and declare a loss on it. But the IRS disallows this activity, since you may not buy 30 days before or after the sale and still claim a loss.
When you do, add the amount of disallowed loss to the basis of the shares that caused the wash sale. These are the new shares you received. By doing this, you defer the loss, but it's not disallowed for good. You'll get the benefit of the loss when you eventually sell the new shares (unless it's another wash sale!).
Wash sales are reported to the IRS on Form 8949.
Selling shares from one account and buying them in another is not a work-around. Brokers track and report wash sales within the same account and include the sales in the gain and loss report to the IRS. However, if the trades are in different accounts, you are responsible for tracking wash sales.
The good news is that any loss realized on a wash sale is not entirely lost.
How to avoid a wash sale. One way to avoid a wash sale on an individual stock, while still maintaining your exposure to the industry of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry.
How often can you buy and sell the same stock? You can buy and sell the same stock as often as you like, provided that you operate within the restrictions imposed by FINRA on pattern day trading and that your broker allows it.
If you wish to repurchase an investment that you have recently sold, over 30 days must elapse between the two transactions in order for you to utilise your CGT exemption or create a loss to offset against other gains realised within the same tax year.
One way to defeat the wash sale rule is with a “double up” strategy. You buy the same number of shares in the stock you want to sell for a loss. Then you wait 31 days to sell the original batch of shares.
As a retail investor, you can't buy and sell the same stock more than four times within a five-business-day period. Anyone who exceeds this violates the pattern day trader rule, which is reserved for individuals who are classified by their brokers are day traders and can be restricted from conducting any trades.
The wash sale rule states that if you buy or acquire a substantially identical stock within 30 days before or after you sold the declining stock at a loss, you generally cannot deduct the loss.
The easy part of tax-loss selling is getting rid of a loser by Dec. 31. So long as you hold the stock in a taxable account, you will be able to use the loss to offset taxable capital gains for 2024.
Consequences of running afoul of the wash sale rule can be significant: The loss from the sale of the original shares is disallowed. The amount of the disallowed loss is added to the basis of the newly acquired shares, and realized only when the newly acquired position is sold.
The wash sale is reported in Box 1g of Form 1099-B. Note: Wash sales are in scope only if reported on Form 1099-B or on a brokerage or mutual fund statement.
The Bottom Line
To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it. An investor could also sell a stock at a loss, register the loss, and then buy a similar investment.
Pattern day trading is not inherently illegal. However, it's subject to stricter regulatory oversight than other trading activities. Pattern day traders are also required to maintain a higher minimum account balance. These additional rules aim to protect investors from the higher risks associated with frequent trading.
Your maximum net capital loss in any tax year is $3,000. The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). You can reduce any amount of taxable capital gains as long as you have gross losses to offset them.
How Long Do You Have to Wait After a Wash Sale? After selling a security at a loss, you must wait 31 days to repurchase the same or a substantially identical security to avoid triggering the wash sale rule.
One of the primary reasons traders lose money is the absence of a clear trading strategy. According to research by Bloomberg, over 80% of day traders quit within the first two years, often due to insufficient strategies. One of the primary reasons traders lose money is the absence of a clear trading strategy.
Interactive Brokers includes wash sales on daily, monthly and annual Activity Statements for all 1099-eligible accounts, as required by the IRS. Our wash sales are calculated on a granular basis, in other words as the shares actually trade through the system.
Generally, the wash sale rule applies to traders the same way it applies to investors. The difference is that traders have a much harder time keeping records relating to wash sales because they engage in so many transactions.
For example, let's say you sell ABC stock on July 15. 30 days prior to that is June 15; 30 days after is August 14. In order to avoid a wash sale you would have to have bought ABC stock before July 15 or after August 14. The wash sale period includes the date of sale plus or minus 30 days.