Don’t let losses circle the drain

Be Mindful of the Wash Sale Rule When Harvesting Investment Losses

With recent market volatility, you may be considering selling underperforming stocks, mutual funds, or ETFs held in a taxable brokerage account. The good news: selling a losing investment can potentially yield a capital loss you can use to offset gains. But beware — the wash sale rule could prevent you from claiming that loss for federal income tax purposes.

Understanding the Wash Sale Rule

A capital loss on the sale of a security is disallowed if you buy substantially identical securities within the 61-day window that begins 30 days before and ends 30 days after the sale date.

The rationale behind the wash sale rule is simple: if you sell a security at a loss and quickly repurchase it (or a substantially identical one), it’s considered a “wash” — economically, you’re in the same position as before. As a result, the IRS denies the tax loss.

However, the loss isn’t gone forever. Instead, the disallowed loss is added to the basis of the newly acquired shares. When you later sell those shares, this increased basis will reduce your gain or increase your loss.

Example

You purchased 2,000 shares of ABC stock for $50,000 on May 5, 2024, through your taxable brokerage account. The stock dropped, and on April 3, 2025, you sold the shares for $30,000 — expecting a $20,000 capital loss.

Later, on April 28, 2025, you bought 2,000 ABC shares again for $31,000, believing in its long-term potential.

Unfortunately, because this repurchase occurred within 30 days of the loss sale, the wash sale rule applies. Your $20,000 loss is disallowed and instead added to the new purchase’s basis, giving you a revised basis of $51,000 ($31,000 + $20,000). You’ll recover the tax benefit only when you eventually sell these new shares.

Strategy to Avoid a Wash Sale

The wash sale rule only matters if you plan to sell for a loss but still want to own the investment. This often happens when an investor believes the security will rebound in value.

One way to avoid triggering the rule is the “double-up” strategy:

• First, buy an identical number of shares of the same security.
  
• Then wait 31 days before selling your original position.
  

This allows you to realize a legitimate capital loss while maintaining your overall market exposure.

Cryptocurrency Exception (for now)

The IRS currently treats cryptocurrency as property, not a security. That means the wash sale rule doesn’t apply when you sell a cryptocurrency for a loss and buy it back shortly before or after. The loss is fully recognized, based on the holding period (short- or long-term).

Important: Losses from crypto-related securities — like Coinbase stock — are subject to the wash sale rule, since these are classified as securities under federal tax law.

Final Thoughts

Harvesting capital losses can be an effective way to lower your tax bill — but only if you avoid the wash sale trap. Currently, cryptocurrency losses are an exception, but traditional securities are not.

If you’re considering tax-loss harvesting and want to ensure your strategy complies with IRS rules, reach out to us for personalized guidance.