The Wash-Sale Rule for Active Traders

If you sell a security at a loss and buy a substantially identical security within 30 days before or after that sale, the loss is disallowed for the current period and added to the cost basis of the replacement shares. It is a 61-day window centered on the sale, not 30 days forward only — that detail catches a lot of people.

The loss is not destroyed. It is deferred into the new position's basis, which means you eventually get it, either when you finally close out and stay out for 31 days or, in a taxable account, when you stop trading the name entirely.

Gains are never affected. The rule only touches losses, which is why a heavily traded losing year can still show a net taxable gain: the winners are all recognized, and a chunk of the losers is sitting in basis.

Same stock, same issuer: clearly identical. Different companies in the same sector: generally not. The trap is options — buying a call on a stock you just sold at a loss can trigger the rule, and so can selling a deep in-the-money put, because you have reestablished essentially the same exposure.

Buying the replacement in a different account does not fix it, and buying it in an IRA is the worst version: the loss is disallowed and there is no basis in a taxable account to absorb it later. That one is permanently lost.

Bonds and preferred shares with materially different terms are usually not identical to the common. ETFs tracking different indices are usually not identical to each other, though two funds tracking the same index are a gray area worth avoiding.

Trade the same ticker repeatedly and each loss rolls into the basis of the next entry, which then generates another wash sale when it closes red inside the window. The chain continues until you break it. Brokers report all of this correctly on the 1099-B, so the number you see already accounts for it — the surprise is in what that number is.

The chain breaks at year end only if you are flat and stay flat for 31 days across the calendar boundary. If you are holding the name on December 31 and repurchase in early January, the deferred losses carry into the next tax year rather than landing in the year you actually took them.

This is why active traders who trade a small basket of tickers all year should look at their realized numbers before December, not in April. The only lever available late in the year is deciding whether to be flat through the window.

If your activity is substantial, frequent, and continuous enough to qualify as a trading business, you may be eligible for trader tax status. That status alone does not remove wash sales; what does is a Section 475(f) mark-to-market election, which treats open positions as sold at year end and takes securities out of wash-sale and capital-loss-limitation treatment entirely.

The election is not casual. It has a filing deadline that generally falls with the prior year's return, it converts gains and losses to ordinary treatment, it removes long-term capital gain rates from those securities, and revoking it requires IRS procedure. Traders who elect it usually do so with a CPA who works with active traders specifically.

The practical takeaway: wash sales are a bookkeeping and timing problem for most people and an entity-and-election problem for full-time traders. Both are solvable, and both are solved before year end rather than at filing.