There are no clear guidelines on what constitutes a substantially identical security. The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated.

How do I bypass wash sale rule?

If you own an individual stock that experienced a loss, you can avoid a wash sale by making an additional purchase of the stock and then waiting 31 days to sell those shares that have a loss.

The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated.

How often do traders fail the wash sale rule?

Even the best traders fail 30-40% of the time. The wash sale rule was designed as a way to keep you from claiming all losses of the same stock when purchased in a certain time frame. In other words, you sell a stock for a loss and less. Then 30 days later you buy the same stock, or an identical one, hoping to cover the loss.

When does a wash sale become a capital loss?

Put simply, the wash sale rule prohibits an investor from claiming a capital loss for tax purposes if they repurchase the stock or security within 30 days. Specifically, the IRS deems a transaction a wash sale if the investor does the following 30 days before or after a sale:

How to avoid a wash sale on a stock?

One way to avoid a wash sale on an individual stock, while still maintaining your exposure to the industry of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry. ETFs can be particularly helpful in avoiding the wash-sale rule when selling a stock at a loss.

Is it illegal to do a wash trade?

Wash trading is highly illegal; however, it’s fairly easy for an investor to inadvertently fall into the wash sale trap when the time comes to recognize losses. For this reason, investors must pay close attention to when they buy and sell securities to avoid committing an illegal trade.