Wash

Key takeaways

• In general usage, a wash is a transaction (or set of transactions) that results in a net gain of zero—a break-even outcome.
• For investors, the IRS wash sale rule can disallow a loss if the same or a substantially identical security is repurchased within 30 days before or after the sale.
• A disallowed loss is not lost permanently: it is added to the cost basis of the replacement shares and the original holding period carries over.

What is a wash?

A wash refers to transactions that cancel each other out so there is no net profit or loss. In business, this might mean spending and receiving the same amount; in investing, it often describes selling one position at a loss while realizing an equal gain elsewhere.

In tax contexts, the term is commonly used when an investor realizes a loss but then repurchases the same (or substantially identical) security within a short time frame, triggering special IRS treatment.

The wash-sale rule (tax perspective)

The IRS wash-sale rule prevents taxpayers from claiming a deductible loss when they sell a security at a loss and buy the same or a substantially identical security within 30 days before or after the sale. That creates a 61-day window (30 days before + sale day + 30 days after) during which repurchases can disallow the loss.

The rule is intended to stop taxpayers from creating artificial tax losses while maintaining an economic position in the security.

Example

An investor buys 100 shares of a stock for $10,000. The shares fall to $7,000 and the investor sells, realizing a $3,000 loss. If the investor repurchases the same 100 shares within 30 days, the $3,000 loss is disallowed for current tax deduction purposes. Instead, the $3,000 is added to the cost basis of the replacement shares. If the repurchase price is $7,000, the adjusted basis becomes $10,000 (7,000 + 3,000). The loss is effectively deferred and may reduce future taxable gains.

Additionally, the holding period of the original shares is tacked onto the replacement shares, which can help qualify for long-term capital gains treatment sooner.

Practical effects and avoidance strategies

• If you want to claim a tax loss, avoid buying the same or a substantially identical security within the 30-day window (wait at least 31 days).
• To maintain market exposure without triggering the rule, consider buying a different security or an ETF that provides similar but not “substantially identical” exposure.
• Be mindful of purchases across accounts—repurchases in different taxable accounts or brokerages can still trigger the wash-sale rule.

When a wash is illegal (market manipulation)

Some transactions resembling wash sales are illegal when used to manipulate the market, such as buying in one account and selling in another with the intent to create misleading activity or pump-and-dump interest. Those actions can violate securities laws and attract enforcement beyond the tax consequences.

Conclusion

A wash can simply mean a break-even outcome, but for investors it has important tax implications. The IRS wash-sale rule disallows immediate deduction of losses when the same or substantially identical securities are repurchased within the restricted window, though the loss is deferred by adjusting the basis and carrying over the holding period to replacement shares. Planning purchases with the wash-sale rule in mind can preserve tax benefits while managing market exposure.