An investor who sells a security at a loss and reacquires a substantially identical one within a defined window cannot claim that loss currently. The rule does not erase the loss; it moves it.
The rule targets a sale with no change in position
A loss is normally recognized when a position is sold. If the investor immediately rebuys the same security, the economic exposure never changed, and only the tax result did.
The wash sale rule addresses that by disallowing the loss when a substantially identical security is acquired within thirty days before or after the sale. The window runs in both directions.
The forward-looking half surprises people, since a purchase made before the sale can trigger the rule on a sale that follows it.
Disallowance moves the loss into the new basis
The disallowed loss is added to the cost basis of the replacement shares, and the holding period of the original position carries over to them.
The effect is deferral. When the replacement position is eventually sold outside a wash sale window, the added basis produces a larger loss or a smaller gain at that time.
Because the loss is preserved rather than forfeited, the consequence is timing, though timing across tax years can still matter to a filer.
Substantially identical is narrower than similar
Shares of the same company are substantially identical. Shares of a different company in the same industry generally are not, even when they behave similarly in the market.
Two index funds tracking different indexes are commonly treated as distinct, while two funds tracking the same index invite closer scrutiny. The statute does not provide a bright-line list.
Options and convertible instruments on the same underlying can also fall within the concept, depending on their terms.
Accounts are aggregated across the household
A purchase in a spouse's account or a controlled entity can trigger the rule on a sale in the taxpayer's account. The analysis is not confined to a single brokerage.
Replacement purchases inside a tax-advantaged retirement account produce a harsher outcome, since the disallowed loss cannot be added to basis in a way that provides later benefit.
Automatic dividend reinvestment is a frequent unintentional trigger, because a small reinvested purchase within the window applies to the shares it acquires.
Reporting responsibility is split
Brokers report wash sales they can identify within a single account for covered securities, and the adjustments appear on the year-end statement.
Transactions spread across multiple institutions or accounts fall outside any single broker's visibility, leaving the taxpayer to reconcile them. Rules and their application vary by circumstance, so a tax professional is the appropriate source for a particular situation.
The rule's purpose is narrow: it separates a genuine change in position from a paper one.