When a Loss Isn’t a Loss Yet: Understanding Wash Sales

A young IT professional—let’s call him Alex—walked into a tax office frustrated and confused. “I sold a stock at a big loss before year-end,” he said, “but my tax return shows no capital loss at all. The software must be wrong.”

The software was not wrong. The tax rule Alex ran into is called the wash sale rule, and it surprises taxpayers every year—especially during volatile markets. What Alex thought was a $12,000 tax loss turned out to be a loss that was deferred, not deductible, because of how and when he reinvested.

Understanding wash sales is critical because they determine whether a market loss becomes a usable tax benefit—or something you won’t see until much later.

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What is a wash sale?

A wash sale occurs when you sell a security at a loss and then buy the same or a substantially identical security within a 61-day window:

• 30 days before the sale
• The day of the sale
• 30 days after the sale

When this happens, the tax law says the loss cannot be deducted in the current year. Instead, the loss is usually deferred by adding it to the cost basis of the replacement shares. The rule is designed to prevent investors from claiming tax losses while effectively staying in the same investment.

This rule is enforced by the Internal Revenue Service and reported initially by brokers on Form 1099‑B as ‘wash sale loss disallowed’ where applicable. This rule applies whether the repurchase happens intentionally or accidentally.

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Example 1: The classic wash sale with basis adjustment

• December 5, 2025
  You buy 100 shares of Stock A at $100 per share
  Cost basis: $10,000
• December 20, 2025
  You sell all 100 shares for $80 per share
  Proceeds: $8,000
  Realized loss: $2,000
• December 23, 2025
  You buy back the same 100 shares at $82 per share
  Purchase cost: $8,200

Because the repurchase occurred within 30 days, this is a wash sale.

Tax result:

• The $2,000 loss is not deductible in 2025
• No capital loss appears on Schedule D
• No capital loss carryover is created

Instead, the loss is added to the basis of the new shares bought on December 23, 2025:

$8,200 + $2,000 = $10,200 adjusted basis

The tax benefit is postponed, not lost.

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Example 2: How the deferred loss shows up later

Continuing from the prior example:

• June 2026
  You sell the replacement shares for $10,200

Adjusted basis: $10,200
Sale price: $10,200

Tax result:

• Capital gain = $0
• The earlier $2,000 loss effectively eliminated what would have been taxable gain

The loss finally delivered its tax benefit—just not in 2025.

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Example 3: Partial wash sale (a common surprise)

• You sell 100 shares of Stock B at a $5,000 loss
• Within 30 days, you repurchase 40 shares

Tax result:

• 40% of the loss ($2,000) is disallowed and added to the basis of the 40 replacement shares
• 60% of the loss ($3,000) is deductible in the current year
• Only the deductible portion can offset gains or create a carryover

Many active traders are surprised to learn wash sales can apply partially, not just all-or-nothing.

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Example 4: Wash sales across accounts (where losses can vanish permanently)

• You sell Stock C at a $6,000 loss in your taxable brokerage account
• Within 30 days:
  • Your spouse buys the same stock in their account, or
  • You repurchase it inside your IRA

Tax result:

• The wash sale rule still applies
• The loss is disallowed

Key difference:

• If the repurchase happens in an IRA, the loss is generally permanently lost, because there is no mechanism to adjust basis inside retirement accounts

This is one of the most expensive wash sale mistakes taxpayers make.

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Example 5: Avoiding the wash sale while staying invested

Returning to Alex’s situation:

• He sold a tech stock at a $12,000 loss
• Instead of buying the same stock back, he reinvested in:
  • A sector ETF, or
  • A different company in the same industry

Tax result:

• No wash sale (not substantially identical)
• The $12,000 loss:
  • Offsets capital gains, and
  • Allows up to $3,000 per year to reduce ordinary income, with the rest carried forward

The investment exposure stayed similar, but the tax result was completely different.

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The key lesson

A wash sale does not usually erase a loss—it delays it by pushing the loss into the basis of a replacement investment. But the delay can last months, years, or forever depending on:

• What you repurchase
• When you repurchase
• Which account you use

For taxpayers harvesting losses in 2025, 2026, and beyond, understanding the wash sale rule is the difference between turning a bad market year into a long-term tax asset—or watching that benefit quietly slip away.