Wash sale.

In plain English

A wash sale happens when you sell a stock or security at a loss and buy the same (or 'substantially identical') security within 30 days before or after the sale. The IRS disallows the loss on a wash sale; instead, the disallowed loss is added to the cost basis of the replacement security. The 30-day window applies on both sides, so the full danger period is 61 days centered on the sale date. The rule prevents investors from harvesting losses while keeping their economic position unchanged.

01Why it matters

Tax-loss harvesting (intentionally selling losers to capture deductible losses) is a common, IRS-blessed strategy. Done wrong, the wash sale rule turns it into a no-op for that year. The most common trap is automatic dividend reinvestment in a similar fund inside an IRA, which can trigger a wash sale even though the IRA is tax-sheltered, and disallow the loss in the taxable account.

02The math, step by step

You sell 100 shares of VTI at a $2,000 loss on March 1, planning to claim the loss. On March 20, your taxable brokerage automatically reinvests a small dividend into more VTI shares. That dividend reinvestment triggers a wash sale. The $2,000 loss is disallowed for the year; it gets added to the basis of the reinvested shares instead.

03What this is NOT

04Receipts

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