Wash Sale Rule
Wash Sale Rule
IRS rule disallowing capital loss deductions when a substantially identical security is repurchased within 30 days before or after the sale (61-day total window). The disallowed loss is deferred by adding it to the cost basis of the replacement security, not permanently lost. Applies only to losses, not gains.
An investor buys 100 shares of XYZ Corp at $50 per share ($5,000 cost basis), sells at $40 per share for a $1,000 loss, then repurchases the same stock 15 days later at $42 per share. The $1,000 loss is disallowed for the current year. Instead, it is added to the new cost basis: $42 + $10 (disallowed loss per share) = $52 per share new basis. The loss is deferred, not eliminated.
Students often think the loss is permanently lost, but it is actually deferred by increasing the replacement security cost basis. Another common error is thinking the rule applies to gains (it only applies to losses). The 61-day window calculation is frequently missed: many assume only 30 days after sale, forgetting the 30 days before. Finally, buying in an IRA within 30 days of selling at a loss in a taxable account permanently disallows the loss because IRA basis cannot be adjusted.
How This Is Tested
- Calculating the 61-day wash sale window (30 days before + sale day + 30 days after)
- Determining if a repurchase triggers the wash sale rule based on timing
- Understanding that disallowed losses are added to cost basis of replacement security
- Recognizing that wash sales apply only to losses, not to gains
- Identifying "substantially identical" securities (same stock, convertible securities, bonds with same issuer/coupon/maturity)
- Distinguishing between allowed tax swaps (different issuer) and wash sales
- Understanding that IRA wash sales result in permanent loss, not deferral
Regulatory Limits
| Description | Limit | Notes |
|---|---|---|
| Wash sale window (total) | 61 days | 30 days before sale + sale day + 30 days after sale |
| Days before sale | 30 days | Repurchasing within 30 days before sale triggers wash sale |
| Days after sale | 30 days | Repurchasing within 30 days after sale triggers wash sale |
| Safe repurchase period | After 31 days | Wait 31 days after sale to safely repurchase without wash sale |
Example Exam Questions
Test your understanding with these practice questions. Select an answer to see the explanation.
Jennifer, a high-income investor, sold 500 shares of TechCorp stock on November 20 at a $15,000 loss to offset capital gains for tax purposes. She believes TechCorp is significantly undervalued and wants to repurchase shares. Her adviser recommends waiting until late December to repurchase. What is the primary tax reason for this recommendation?
B is correct. The wash sale rule disallows loss deductions when substantially identical securities are repurchased within 30 days before or after the sale date (61-day window total). Since Jennifer sold on November 20, repurchasing before December 21 (31 days later) would trigger the wash sale rule, disallowing the $15,000 loss for tax purposes. The disallowed loss would instead be added to the cost basis of the repurchased shares, deferring the tax benefit. By waiting until late December (more than 31 days), Jennifer can claim the loss on her current-year tax return while still repurchasing the stock.
A is incorrect because the wash sale rule does not convert loss character from short-term to long-term; it determines whether the loss is currently deductible or deferred. The holding period that determines short-term vs. long-term treatment is unrelated to the wash sale window. C is incorrect because losses are claimed in the year realized (November 20), not based on when replacement shares are purchased. D is incorrect because there is no 45-day minimum waiting period or $10,000 threshold; the wash sale rule applies a 30-day window regardless of loss amount.
The Series 65 exam tests your ability to apply the wash sale rule timing requirements to real client scenarios. Understanding the 31-day safe harbor and advising clients on tax-loss harvesting strategies while avoiding wash sale violations demonstrates competency in tax-efficient portfolio management. This is particularly critical during year-end tax planning when clients want to realize losses while maintaining desired positions.
What is the total window during which repurchasing a substantially identical security will trigger the wash sale rule?
C is correct. The wash sale window is 61 days total: 30 days before the sale date + the sale date itself + 30 days after the sale date. Purchasing substantially identical securities anywhere within this 61-day period triggers the wash sale rule and disallows the loss deduction.
A (30 days) only accounts for the period after the sale and ignores the 30 days before, which is a common misconception. B (60 days) incorrectly omits the sale date itself from the calculation. D (90 days) is incorrect; there is no 45-day period in the wash sale rule.
The Series 65 exam frequently tests the precise 61-day wash sale window calculation because it is commonly misunderstood. Candidates often remember "30 days" but forget the rule includes 30 days before AND after the sale, plus the sale date itself. Accurate understanding of this window is essential for advising clients on tax-loss harvesting strategies.
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A is correct. The wash sale rule prohibits repurchasing substantially identical securities within 30 days after the sale. To safely avoid the wash sale rule, the investor must wait until at least 31 days after the sale date. March 15 + 31 days = April 15 (a Monday). Repurchasing on April 15 or later allows the investor to claim the capital loss deduction while repurchasing the same security.
B (April 12) is only 28 days after the sale, which is still within the 30-day danger zone and would trigger the wash sale rule. C (April 16) would also work (32 days), but it is not the earliest safe date asked for in the question. D (February 12) is before the sale date and would violate the "30 days before sale" portion of the wash sale rule if the investor had purchased on that date.
The Series 65 exam tests practical date calculation for wash sale compliance. Investment advisers must be able to calculate exact safe repurchase dates to help clients harvest tax losses while maintaining desired portfolio positions. Understanding that 31 days (not 30) is required demonstrates mastery of this critical tax planning rule.
All of the following statements about the wash sale rule are accurate EXCEPT
B is correct (the EXCEPT answer). The wash sale rule applies ONLY to capital losses, not to capital gains. When an investor sells at a gain and repurchases the same security within 30 days, there is no wash sale violation because the rule is designed to prevent artificial loss creation for tax purposes, not to restrict gain realization. This is a critical distinction that frequently appears on the Series 65 exam.
A is accurate: disallowed losses are not permanently lost; they are added to the cost basis of the replacement security, deferring the tax benefit to a future sale. B is the false statement. C is accurate: substantially identical securities include the same stock, rights, warrants, calls, convertible securities, and for bonds, those with the same issuer, coupon rate, and maturity date (all three must match). D is accurate: purchasing in an IRA after selling at a loss in a taxable account within 30 days permanently disallows the loss because IRA cost basis cannot be adjusted, causing the loss to disappear rather than being deferred.
The Series 65 exam tests your ability to distinguish between wash sale application to losses (applies) versus gains (does not apply). This distinction is essential because advisers must understand when the rule restricts client tax planning strategies. Incorrectly applying wash sale restrictions to gains could lead to unnecessary client limitations on portfolio management.
An investor sold 200 shares of XYZ Corporation at a $4,000 loss on October 15 and repurchased 200 shares of XYZ Corporation on November 10 at a higher price. Which of the following statements about this transaction are accurate?
1. The $4,000 loss is immediately deductible on the current year tax return
2. The wash sale rule is triggered because the repurchase occurred within 30 days of the sale
3. The disallowed loss will be added to the cost basis of the November 10 shares
4. Waiting until November 16 or later to repurchase would have avoided the wash sale
C is correct. Statements 2, 3, and 4 are accurate.
Statement 1 is FALSE: The $4,000 loss is NOT immediately deductible because the wash sale rule was triggered. Sale date was October 15, and repurchase was November 10, which is 26 days later (within the 30-day danger zone after the sale). The loss is disallowed for current year tax purposes.
Statement 2 is TRUE: The repurchase on November 10 is 26 days after the October 15 sale, which falls within the 30-day window after the sale. This triggers the wash sale rule and disallows the loss deduction.
Statement 3 is TRUE: Under the wash sale rule, disallowed losses are not permanently lost. Instead, they are added to the cost basis of the replacement shares purchased on November 10. This defers the tax benefit to a future sale when the November shares are eventually sold.
Statement 4 is TRUE: To avoid the wash sale rule, the investor must wait at least 31 days after the sale before repurchasing. October 15 + 31 days = November 15. Therefore, repurchasing on November 16 or later (32+ days after the sale) would have been outside the 30-day wash sale window and allowed immediate loss deduction.
The Series 65 exam tests comprehensive understanding of wash sale mechanics, including timing calculations, loss deferral (not elimination), and safe repurchase periods. Advisers must understand that wash sale violations do not eliminate losses permanently but rather defer them through cost basis adjustments. This knowledge is critical for year-end tax planning and explaining wash sale consequences to clients who may fear their losses are lost forever.
💡 Memory Aid
Think of wash sales as the "61-Day Danger Zone": 30 days before + sale day + 30 days after = 61 days total. Picture a security "washing away" your loss if you buy too soon. Wait 31 days after selling to safely repurchase. Remember: Loss is deferred (added to new cost basis), not deleted. Only applies to losses, never gains.
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Where This Appears on the Exam
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