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What is the Wash Sale Rule?
By Bajaj Broking Team
November 26, 2025
5 mins read
News
If you spend any time trading or investing in the US stock market, you know taxes can be tricky. One small mistake and you could find yourself facing penalties you never expected.
One of the rules you should be aware of is the wash sale rule. It’s a tax rule that often catches investors off guard — especially when they try to manage losses smartly.
The idea is simple. If you sell a security at a loss and then quickly buy it back (or something nearly identical), the IRS may decide that your loss isn’t valid for tax purposes.
That means the loss you thought you could use to reduce your tax bill might suddenly be disallowed. And that can throw your entire tax strategy off balance if you are not careful.
Understanding the Wash Sale
The wash sale rule has been around since 1921. The IRS — America’s tax authority — introduced it to stop investors from creating artificial losses just to lower their tax bills.
Here’s how it works. A “wash sale” happens if you sell a security at a loss and then repurchase the same or a substantially similar one within 30 days before or after the sale.
The 30-day window includes the sale date itself, creating a 61-day total period. It also applies if your spouse or a company you control makes the purchase during that time.
Why does this matter for you? Because if you trigger this rule, the IRS won’t let you use that loss to offset other gains. It’s as if the loss never happened for tax purposes.
Some investors try to sell before a price rebound, book a loss, and quickly re-enter the same position. The IRS created this rule precisely to stop such tactics from being used to reduce tax liability.
Wash Sale Examples
Sometimes, examples make things clearer. Let’s walk through two common scenarios that might affect you.
Example 1:
You buy 100 shares of XYZ Inc. at $100 each, worth $10,000 total. A few days later, the price drops to $80. You sell and book a $2,000 loss.
Three days later, you repurchase 100 shares of XYZ at $70, believing the price will rise. The IRS now considers this a wash sale — meaning you cannot use the $2,000 loss to reduce your tax bill.
However, if you had waited 31 days before repurchasing, you could have claimed the loss. The extra time keeps you clear of the rule.
Example 2:
You buy 100 shares of ABC Inc. at $1,000. The price later falls to $800. You buy 100 more shares at this lower price and sell your original lot, realising a $200 loss.
Since you purchased the same security within 30 days before selling, the rule applies again. That means you can’t use the loss to offset other trading gains.
The simplest way to avoid triggering this rule — intentionally or not — is to wait 31 days before repurchasing the same or a similar asset.
What is the Logic Behind a Wash Sale?
At its core, the wash sale rule exists to maintain fairness in the tax system. Without it, many investors could create artificial losses while still holding the same investment.
Imagine this: you sell a stock at a loss, claim a tax deduction, and then buy the stock again the next day. You haven’t really changed your position — yet you’ve reduced your tax bill.
The IRS wants to prevent this kind of manipulation. By disallowing losses when you repurchase too soon, the rule ensures that tax deductions reflect real, economic losses — not just accounting tricks.
For you, this means tax planning must be deliberate. Selling, claiming, and buying again is more complicated than it looks, and timing becomes a crucial part of your strategy.
Triggering a Wash Sale for Tax-Loss Harvesting
Many investors use tax-loss harvesting — selling losing positions to offset gains elsewhere. But if you’re not careful, this is where the wash sale rule can quietly trip you up.
If you repurchase the same stock, ETF, or even a similar security too soon, the loss won’t count. The IRS will simply deny the deduction, even if the sale and repurchase weren’t intentional.
You need to pay attention to the 30-day window on both sides of the transaction. That means no purchases of the same or “substantially identical” assets within that 61-day period.
Being aware of this timing can make or break your tax strategy. It’s not about avoiding tax-loss harvesting — it’s about doing it correctly so your efforts actually count.
Does the Wash Sale Rule or Its Equivalent Exist in India?
Here’s where things change for you if you trade in India. The wash sale rule is a US-specific tax rule. It’s enforced by the IRS and applies only to US markets.
In India, there’s no direct equivalent. You can sell a stock at a loss, immediately buy it again, and still use the loss to offset your gains for tax purposes.
This flexibility is why tax-loss harvesting is more straightforward for Indian investors. You don’t have to worry about timing purchases or counting days before re-entering a trade.
Many Indian investors actively use these strategies without restrictions. If you hold a stock that has lost value, you can sell it, realise the loss, and even repurchase it immediately — all without affecting your tax calculation.
Conclusion
The wash sale rule might seem like a small detail, but it can have a big impact on your tax planning if you invest in the US.
It’s designed to stop you from claiming losses on sales when you haven’t truly exited a position. And if you’re not aware of it, you might unintentionally break the rule and lose a tax deduction.
The key is timing. If you sell at a loss and want to claim it, wait at least 31 days before buying the same or a substantially similar security again.
If you don’t care about claiming the loss, you can trade as usual — but understanding how this rule works helps you avoid costly surprises later.
And if you invest only in Indian markets? You don’t need to worry about it at all. The concept doesn’t exist here — which means you have more flexibility when planning your tax strategies.
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