“You Sold Stock at a Loss—But the IRS Won’t Let You Deduct It. Here’s Why.”

You sold a stock for less than you paid.
You’re counting on that loss to offset gains—or even reduce your taxable income by up to $3,000.

But when you file your return, the deduction disappears.

What happened?

Chances are, you triggered the wash sale rule—an IRS rule that disallows losses if you buy “substantially identical” stock too soon before or after the sale.

Let’s break down how it works—and how to avoid it next time.

🔍 What Is a Wash Sale?

Per Pub 550, p. 73:

“A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you buy substantially identical stock or securities.”

That 61-day window (30 days before + day of sale + 30 days after) is your danger zone.

💡 Example:

  • Jan 15: You buy 100 shares of XYZ for $1,000
  • Feb 10: You sell them for $750 (a $250 loss)
  • Feb 20: You buy 100 shares of XYZ again for $800
    → Your $250 loss is disallowed under the wash sale rule.

🚫 What Counts as “Substantially Identical”?

  • Same stock or mutual fund: Definitely counts
  • Options on the same stock: Yes
  • ETFs tracking the same index (e.g., two S&P 500 ETFs): Often yes
  • Different companies in the same sector: Usually no (e.g., Apple vs. Microsoft)

⚠️ Watch out: Buying the same stock in your IRA also triggers a wash sale—and the loss is permanently lost, not deferred.

✅ What Happens to the Disallowed Loss?

Good news: It’s not gone forever.
The IRS adds the disallowed loss to the cost basis of your new shares.

In the example above:

  • New basis = $800 + $250 = $1,050
  • When you eventually sell those shares, your gain will be lower (or loss higher)

This defers the deduction—it doesn’t eliminate it (unless bought in an IRA).

💡 How to Avoid Wash Sales

  1. Wait 31 days before repurchasing the same stock
  2. Buy a similar but not identical investment (e.g., switch from VOO to IVV—but consult a pro first)
  3. Harvest losses early in the year—so you have time to adjust if needed
  4. Never repurchase in an IRA within the window—losses there are gone forever

💬 Final Advice from Uncle Joe Tax

Tax-loss harvesting is smart—but only if you respect the rules.
The wash sale rule exists to stop people from “pretending” to sell while keeping their position.

So if you’re selling at a loss, stay out of that stock for 31 days.
Your future self—and your tax return—will thank you.