The Wash Sale Rule

The wash sale rule disallows a loss when you sell a security and buy back something substantially identical within a short window around the sale. The loss is not lost forever, it is added to the basis of the replacement position, but the timing shift can produce a tax bill that bears no resemblance to how your year actually went. For high-turnover traders who keep returning to the same names, it is one of the most disruptive rules in the code. It also does not apply to futures at all.

How the rule works

Sell a security at a loss, and if you acquire a substantially identical one within 30 days before or 30 days after that sale, the loss is disallowed for that year. The window runs in both directions, which surprises people: buying first and then selling the older lot at a loss can trigger it just as easily as selling and buying back.

The disallowed amount is added to the cost basis of the replacement position. Economically nothing is destroyed, and when you eventually exit the replacement without repurchasing, the benefit comes through. But it can be deferred across a year boundary, which is where the pain lands. A trader can finish a year roughly flat in cash terms and still owe tax on gains, because the offsetting losses were disallowed and pushed into the following year.

What counts as substantially identical

The phrase is not precisely defined, which is a recurring theme in this area. Some cases are clear and some genuinely are not.

Why futures escape it

Section 1256 contracts are not subject to the wash sale rule. The reason is structural rather than a carve-out for traders: those contracts are already marked to market at year end, so every position is treated as closed and reopened annually at fair value. There is no deferral for the wash sale rule to prevent, because the mark has already forced recognition.

The practical effect is that an active futures trader can enter and exit the same contract as often as their strategy requires without any of their losses being disallowed. Combined with the 60/40 split, this is a large part of why the tax treatment of futures is more favourable to high-turnover trading than the treatment of stocks.

This is also why extending a mark-to-market election to Section 1256 contracts to escape wash sales makes no sense. They were never subject to the rule. The election would cost you the 60/40 split to solve a problem you did not have.

Living with the rule if you trade securities

• Track the 61-day window per security rather than per trade, because the rule looks across all your purchases of that name.
• Remember it works backwards as well as forwards. A purchase 30 days before the loss sale counts.
• Watch the year boundary in particular. A disallowed loss in late December is the version that actually changes your tax bill.
• Include every account you control in the analysis, not just the one where the loss occurred.
• If wash sales are materially distorting your results year after year, that is one of the strongest arguments for considering a 475(f) election, assuming you qualify.

What to record

Broker reporting flags wash sales, but it does so per account and after the fact. If you trade the same names across more than one account, or want to see the problem forming rather than discovering it in February, your own record is what makes that possible.

The useful fields are the ones you would keep anyway: instrument, date, direction and result. What changes is that you want to be able to group by instrument across a rolling window rather than only by trade. Any journal that lets you filter by symbol and sort by date will do it.

Sources and Further Reading

For authoritative data and further reading on this topic, refer to CME Group, CFTC (US Commodity Futures Trading Commission), IRS and SEC Investor.gov. Always confirm current rules, rates and contract specifications on the official source before you trade.