Guide · Risk Management
What Is a Wash Sale? The Tax Rule That Can Erase Your Deduction
Selling a losing position to claim a tax deduction, then buying it right back, doesn't work the way it sounds like it should — a specific rule exists just to stop that.
A wash sale happens when an investor sells a security at a loss and then buys the same or a "substantially identical" security within 30 days before or after that sale — a 61-day window in total. In jurisdictions with this rule (the U.S. is the clearest example), the tax authority disallows the loss deduction for that sale if a wash sale occurred, on the theory that the investor never actually changed their market position in any meaningful way.
The rule exists specifically to close an obvious loophole: without it, an investor could sell a stock at a loss on December 31st purely to claim the deduction, then buy it back on January 2nd, ending up in the exact same position while still pocketing a tax benefit for a "loss" that was never really realized in any economic sense.
The disallowed loss isn't simply gone — it gets added to the cost basis of the repurchased shares, deferring the tax benefit rather than eliminating it outright, though the timing difference can still matter considerably depending on when the position is eventually sold for good. Tracking cost basis correctly across a wash sale is exactly the kind of bookkeeping detail that's easy to get wrong with real money on the line, which is one more reason practicing trade timing on Trade2Spike first — where no real tax consequences exist — is a low-stakes way to build the habit of thinking about these rules before they cost anything.