7536 / What is a “wash sale”?

A “wash sale” is a sale or other disposition of stock or securities in which the seller, within a 61-day period (beginning 30 days before and ending 30 days after the date of such sale or disposition), replaces the stock or securities by acquiring (by way of a purchase or an exchange on which the full gain or loss is recognized for tax purposes), or entering a contract or option to acquire, substantially identical stock or securities.¹ Typically, the objective of a wash sale – were it not subject to the special rules of IRC Section 1091(a) explained in Q 7537 – would be for the taxpayer to take advantage of the deduction for capital losses, while maintaining the taxpayer’s position in the corporation by purchasing substantially identical stock or securities. From a tax standpoint, it is as if nothing has happened, and IRC Section 1091(a) treats the sale as a non-event.

The replacement of stock or securities by way of gift, inheritance, or tax-free exchange will not result in a wash sale.² For the definition of “substantially identical stock or securities,” see Q 7539. Except as provided in regulations, the term “stock or securities” includes “contracts or options to acquire or sell stock or securities.” For an explanation, see Q 7559.

If a taxpayer sells stock or securities for a loss, acquiring substantially identical stock or securities within a traditional IRA or Roth IRA within the 61-day period may constitute a wash sale.³

Where there is no substantial likelihood that a put option (see Q 7561) will not be exercised, its sale will be treated as a contract to acquire the stock.⁴