Watch Out for the Wash Sale Rule When Harvesting Tax Losses

Markets have been volatile lately with stock, mutual fund, and ETF prices swinging up and down. If you’ve made an investment in a taxable brokerage account that didn’t pan out, there’s a silver lining: you might be able to sell that losing investment and claim a capital loss to reduce your tax bill. But if you choose to go this route, beware — the wash sale rule could prevent you from using that loss.

What Is the Wash Sale Rule?

The IRS wash sale rule kicks in if you sell a security at a loss and then buy a “substantially identical” security within a 61-day window. That window includes the 30 days before and after the sale.

Why? If you sell and repurchase essentially the same investment within that period, the IRS sees it as a "wash" — in other words, no real economic change has occurred. So, the tax loss is disallowed.

But the loss doesn’t disappear entirely. Instead, it gets added to the cost basis of the newly purchased shares. This adjusted basis will either reduce your taxable gain or increase your loss when you sell the replacement shares.

Example: How a Wash Sale Can Cost You

Let’s say you bought 2,000 shares of Amazon stock for $50,000 on May 5, 2024, in your taxable brokerage account. By April 4, 2025, the stock has dropped, so you sell all the shares for $30,000, thinking you’ve locked in a $20,000 capital loss for tax purposes.

Then, on April 29, 2025 (less than 30 days later) you repurchase 2,000 shares of Amazon for $31,000 because you still believe in the company. Unfortunately for you, this triggers the wash sale rule. Your $20,000 loss is disallowed (for now) and gets added to the basis of your new shares.

So, your new cost basis is $51,000 ($31,000 purchase price + $20,000 disallowed loss). You’ll only benefit from that loss once you sell the new shares.

How to Avoid the Wash Sale Rule

Here’s one way around the wash sale rule: the “double-up” strategy. This occurs when you buy an additional batch of the same stock or fund before selling your original shares. Wait at least 31 days before selling the original holding at a loss, and this allows you to realize the loss without triggering the wash sale rule while maintaining your position in the investment.

Special Case: Cryptocurrency Losses

The IRS currently classifies cryptocurrencies as property, not securities. That means the wash sale rule does not apply to crypto. You can sell a cryptocurrency at a loss and repurchase it shortly before or after the sale without disqualifying the loss.

However, this exemption does not apply to crypto-related stocks or funds (like Coinbase stock), which are still considered securities.

Be Strategic with Loss Harvesting

Harvesting capital losses can be a smart move to offset gains and reduce taxes, but only if you avoid the wash sale trap.

Need help navigating these rules or planning tax-efficient investments? Feel free to reach out for guidance tailored to your situation.