What is the purpose of the wash sale rule?
In a comment on this answer you asked  It's not clear to me why the ability to defer the gains would matter (since you never materially benefit until you actually sell) but the estate step up in basis is a great point! Could you describe a hypothetical exploitive scenario (utilizing a wash sale) in a little more detail?  This sounds like you still have the same question as originally, so I'll take a stab at answering with an example.   I sell some security for a $10,000 profit.  I then sell another security at a $10,000 loss and immediately rebuy.  So pay no taxes (without the rule).  Assuming a 15% rate, that's $1500 in savings which I realize immediately.  Next year, I sell that same security for a $20,000 profit over the $10,000 loss basis (so a $10,000 profit over my original purchase).  I sell and buy another security to pay no taxes.  In fact, I pay no taxes like this for fifty years as I live off my investments (and a pension or social security that uses up my tax deductions).  Then I die.  All my securities step up in basis to their current market value.  So I completely evade taxes on $500,000 in profits.  That's $75,000 in tax savings to make my heirs richer.  And they're already getting at least $500,000 worth of securities.   Especially consider the case where I sell a privately held security to a private buyer who then sells me back the same shares at the same price.   Don't think that $10,000 is enough?  Remember that you also get the original value.  But this also scales.  It could be $100,000 in gains as well, for $750,000 in tax savings over the fifty years.  That's at least $5 million of securities.   The effective result of this would be to make a 0% tax on capital gains for many rich people.   Worse, a poorer person can't do the same thing.  You need to have many investments to take advantage of this.  If a relatively poor person with two $500 investments tried this, that person would lose all the benefit in trading fees.  And of course such a person would run out of investments quickly.   Really poor people have $0 in investments, so this is totally impractical. "'Note that ""to keep an investor from lowering their tax bill"" is not an explanation'. Well, yes it is. In fact  it is the only explanation. The rule plainly exists to prevent someone from realizing a loss when their economic situation remains unchanged before/after a sale. Now, you might say 'but I have suffered a loss, even if it is unrealized!' But, would you want to pay tax on unrealized gains? The tax system still caters to reducing the tax impact of investments, particularly capital investments. Part and parcel with the system of taxing gains only when realized, is that you can recognize losses only when realized. Are there other ways to 'artificially' reduce taxable income? Yes. But the goal of a good tax system should be to reduce those opportunities. Whether you agree that it is fair for the government to prevent this tax-saving opportunity, when others exist, is another question. But that is why the rule exists." "Overall the question is one of a political nature.   However, this component can have objective answers: ""What behavior is trying to be prevented?"" There are mechanisms by which capital gains can be deferred (1031 like-kind exchange, or simply holding a long position for years) or eliminated by the estate step up in basis.  With these available, mechanisms that enable basis-reduction are ripe for abuse.   On the other hand, if this truly bothers you then if you meet the IRS qualifications of a day trader, you may elect to use ""mark to market"" accounting, eliminating this entirely as a concern. Special rules for traders of securities" Equal sized gains and losses in alternating years would lead to an   unjust positive tax. On the contrary. If I can take my gains at the long term rate (15%) in even years, but take losses in odd years, up to $3000, or let them offset short term gains at ordinary rate, I've just gamed the system.  What is the purpose of the wash sale rule? Respectfully, we here can do a fine job of explaining how a bit of tax code works. And we can suggest the implication of those code bits. But, I suspect that it's not easy to explain the history of particular rules. For wash sale, the simple intent is to not let someone take a loss without actually selling the stock for a time. You'd be right to say the +/- 30 days is arbitrary.  I'd ask you to keep 2 things in mind if you continue to frequent this board -
I agree. I don't really see a good argument (not that there isn't one to be made) in the article saying how this is unusual or illegal. Why did the managers sell such a small amount of their holdings? Could they have sold more? Is this selling behavior and scheduling at all abnormal? The article fails to address a number of important questions. "There some specific circumstances when you would have a long-term gain. Option 1:  If you meet all of these conditions: Then you've got a long-term gain on the stock.  The premium on the option gets rolled into the capital gain on the stock and is not taxed separately.  From the IRS: If a call you write is exercised and you sell the underlying stock, increase your amount realized on the sale of the stock by the amount you received for the call when figuring your gain or loss. The gain or loss is long term or short term depending on your holding period of the stock. https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010630 Option 2: If you didn't hold the underlying and the exercise of the call that you wrote resulted in a short position, you might also be able to get to a long-term gain by buying the underlying while keeping your short position open and then ""crossing"" them to close both positions after one year. (In other words, don't ""buy to cover"" just ""buy"" so that your account shows both a long and a short position in the same security.  Your broker probably allows this, but if not you, could buy in a different account than the one with the short position.)  That would get you to this rule: As a general rule, you determine whether you have short-term or long-term capital gain or loss on a short sale by the amount of time you actually hold the property eventually delivered to the lender to close the short sale. https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010586 Option 1 is probably reasonably common.  Option 2, I would guess, is uncommon and likely not worthwhile. I do not think that the wash sale rules can help string along options from expiration to expiration though.  Option 1 has some elements of what you wrote in italics (I find that paragraph a bit confusing), but the wash sale does not help you out." "Didn't the US Government break up US Steel and Standard Oil with the Sherman Act for doing just this? monopolizing all aspects of an industry in effort to set prices(eventually artificially high). Specifically section 4.3 of the wiki article on Sherman act   Violations of the ""rule of reason"": A totality of the circumstances test, asking whether the challenged practice promotes or suppresses market competition. Unlike with per se violations, intent and motive are relevant when predicting future consequences. The rule of reason is said to be the ""traditional framework of analysis"" to determine whether Section 1 is violated.[25] The court analyzes ""facts peculiar to the business, the history of the restraining, and the reasons why it was imposed,""[26] to determine the effect on competition in the relevant product market.[27] A restraint violates Section 1 if it unreasonably restrains trade.[28]https://en.wikipedia.org/wiki/Sherman_Antitrust_Act  I don't care because I have a horse in the race, this is purely an academic question. if they start a delivery service it will directly effect the cost of shipping via ups usps and fedex and create an unfair market advantage? I'm also not saying amazon can't start a delivery service but i am interested in how they would have to go about doing so. would it have to be willing to ship non-amazon stuff? surcharges?" Is wash rule applicable for this? No - because you made a gain on the sale.  You paid $13,500 for the stock and sold it for $14,250.   The wash rule prevents you from claiming a loss if you buy the same stock again within 30 days.  You have no loss to claim, so the rule does not apply. Well it would appear that you had a wash sale that canceled out a loss position.  Without seeing the entire report, I couldn't tell you exactly what was happening or how you triggered § 1091.  But just from the excerpted images, it appears as though your purchase of stock was layered into multiple tranches - perhaps you acquired more of the stock in the 61-day period than you sold (possibly because of a prior holding).   If in the 61-day period around the sale of stock (30 days before and 30 days after), you also acquire the same stock (including by contract or option), then it washes out your loss.  If you held your stock for a while, then in a 61-day period bought more, and sold some, then any loss would be washed out by the acquisition.  Of course it is also a wash sale if your purchase of the stock follows your sale, rather than precedes it.  Your disallowed loss goes into the basis of your stock holding, so will be meaningful when you do have a true economic sale of that stock. From IRS Pub 550: A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: Buy substantially identical stock or securities, Acquire substantially identical stock or securities in a fully taxable trade, Acquire a contract or option to buy substantially identical stock or securities, or Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. Looking at your excerpted account images, we can see a number of positions sold at a loss (sale proceeds less than basis) but each one is adjusted to a zero loss.  I suspect the fuller picture of your account history and portfolio will show a more complicated and longer history with this particular stock.  That is likely the source of the wash sale disallowed loss notations. You might be able to confirm that all the added numbers are appearing in your current basis in this stock (or were reflected upon your final exit from the stock). Yes. As long as the stock is in a taxable account (i.e. not a tax deferred retirement account) you'll pay gain on the profit regardless of subsequent purchases.  If the sale is a loss, however, you'll risk delaying the claim for the loss if you repurchase identical shares within 30 days of that sale. This is called a wash sale. Yes. Wash rules are only for losses. "Strangely enough, you have a wash sale, but, for the fact that you sold the shares and then more than 30 days passed, you can take the loss.  I mistakenly used the phrase ""and ended the year with no shared of the stock"" elsewhere, and was corrected, as one can sell at a loss up to 12/31, and have until the end of January to create a wash condition.  In your case, the facts in June combined with you ending the year with no shares removes any doubt, a wash sale, but one that's fully closed out.  Note - while Vicky's answer is correct, it should go on to say that once the stock is not owned for 30 days, the wash sale loss is permitted." Ignoring brokerage fees and the wash-sale rule (both of which are hazardous to your health), and since the 15% LTCG tax is only on the gain, the stock would have to drop 15% of the gain in price since you originally purchased it. "The IRS rules are actually the same.  26 U.S. Code § 1091 - Loss from wash sales of stock or securities In   the case of any loss claimed to have been sustained from any sale or   other disposition of shares of stock or securities where it appears   that, within a period beginning 30 days before the date of such sale   or disposition and ending 30 days after such date, the taxpayer has   acquired (by purchase or by an exchange on which the entire amount of   gain or loss was recognized by law), or has entered into a contract or   option so to acquire, substantially identical stock or securities,   then no deduction shall be allowed... What you should take away from the quote above is ""substantially identical stock or securities."" With stocks, one company may happen to have a high correlation, Exxon and Mobil come to mind, before their merger of course. With funds or ETFs, the story is different. The IRS has yet to issue rules regarding what level of overlap or correlation makes two funds or ETFs ""substantially identical.""  Last month, I wrote an article, Tax Loss Harvesting, which analyses the impact of taking losses each year. I study the 2000's which showed an average loss of 1% per year, a 9% loss for the decade. Tax loss harvesting made the decade slightly positive, i.e. an annual boost of approx 1%." "There is no hard and fast rule. If there was, people could cleverly arrange to make money just often enough to stay on the ""ok"" side. It's a judgement call by the CRA and it probably starts with an audit, and depends on the reasons for the loss. Simple example: your business is selling your time at X an hour and you have expenses that you will cover if you sell Y hours a year, where Y is a lot less than the 2000 hours we have to sell each year. Maybe 300. And you had a big contract but it fell through and though you tried and tried you couldn't get another contract. This will probably be considered a reasonable loss. Another example: your business is selling art or antiques, most of which are kept in your house where you can look at them every day and enjoy them. Your expenses include lots of flights to places where these art or antiques come from, or perhaps are inspired by, along with hotel and restaurant costs, and you would need to sell your entire inventory every year just to cover these expenses, yet you only sell one or two pieces a year (or none) and there's no indication that you're particularly trying to sell more than that. This will probably be considered an unreasonable loss, and if the situation persists for many years in a row, the expenses may end up being disallowed. Side businesses often lose money at first. In fact, once they stop losing money they stop being side businesses. If you have spin up costs like buying hardware, developing software, or acquiring inventory, and you can show how long those extra costs can be expected to last, your expenses are less likely to be disallowed. That's the issue, not how many years in a row the loss occurred. This archived CRA document http://www.cra-arc.gc.ca/E/pub/tp/it364/it364-e.html gives examples of startup expenses that were allowed in years that didn't have revenue, never mind profit." "In the United States, regulation of broker dealer credit is dictated by Regulation T, that for a non-margin account, 100% of a trade must be funded. FINRA has supplemented that regulation with an anti-""free rider"" rule, Rule 4210(f)(9), which reads No member shall permit a customer (other than a broker-dealer or a “designated     account”) to make a practice, directly or indirectly, of effecting transactions in a cash     account where the cost of securities purchased is met by the sale of the same securities.     No member shall permit a customer to make a practice of selling securities with them in a     cash account which are to be received against payment from another broker-dealer where     such securities were purchased and are not yet paid for. A member transferring an     account which is subject to a Regulation T 90-day freeze to another member firm shall     inform the receiving member of such 90-day freeze. It is only funds from uncleared sold equities that are prohibited from being used to purchase securities. This means that an equity in one's account that is settled can be sold and can be purchased only with settled funds.  Once the amount required to purchase is in excess of the amount of settled funds, no more purchases can be made, so an equity sold by an account with settled funds can be repurchased immediately with the settled funds so long as the settled funds can fund the purchase. Margin A closed position is not considered a ""long"" or ""short"" since it is an account with one loan of security and one asset of security and one cash loan and one cash liability with the excess or deficit equity equal to any profit or loss, respectively, thus unexposed to the market, only to the creditworthiness of the clearing & settling chain. Only open positions are considered ""longs"" or ""shorts"", a ""long"" being a possession of a security, and a ""short"" being a liability, because they are exposed to the market. Since unsettled funds are not considered ""longs"" or ""shorts"", they are not encumbered by previous trades, thus only the Reg T rules apply to new and current positions. Cash vs Margin A cash account cannot purchase with unsettled funds.  A margin account can.  This means that a margin account could theoretically do an infinite amount of trades using unsettled funds.  A cash account's daily purchases are restricted to the amount of settled funds, so once those are exhausted, no more purchases can be made. The opposite is true for cash accounts as well.  Unsettled securities cannot be sold either. In summation, unsettled assets can not be traded in a cash account." How come when I sell stocks, the brokerage won't let me cash out for three days, telling me the SEC requires this clearance period for the transaction to clear, but they can swap shit around in under a second?   Be interesting to see what would happen if *every* transaction wasn't cleared until the closing bell. "According to Wikipedia this is still a wash sale: In the USA wash sale rules are codified in ""26 USC § 1091 - Loss from   wash sales of stock or securities."" Under Section 1091, a wash sale occurs when a taxpayer sells or trades   stock or securities at a loss, and within 30 days before or after the   sale:" "It sounds like this is an entirely unsettled question, unfortunately.  In the examples you provide, I think it is safe to say that none of those are 'substantially identical'; a small overlap or no overlap certainly should not be considered such by a reasonable interpretation of the rule. This article on Kitces goes into some detail on the topic.  A few specifics. First, Former publication 564 explains: Ordinarily, shares issued by one mutual fund are not considered to be substantially identical to shares issued by another mutual fund. Of course, what ""ordinarily"" means is unspecified (and this is no longer a current publication, so, who knows). The Kitces article goes on to explain that the IRS hasn't really gone after wash sales for mutual funds: Over the years, the IRS has not pursued wash sale abuses against mutual funds, perhaps because it just wasn’t very feasible to crack down on them, or perhaps because it just wasn’t perceived as that big of an abuse. After all, while the rules might allow you to loss-harvest a particular stock you couldn’t have otherwise, it also limits you from harvesting ANY losses if the overall fund is up in the aggregate, since losses on individual stocks can’t pass through to the mutual fund shareholders. But then goes to explain about ETFs being very different: sell SPY, buy IVV or VTI, and you're basically buying/selling the identical thing (99% or so correlation in stocks owned).   The recommendation by the article is to look at the correlation in owned stocks, and stay away from things over 95%; that seems reasonable in my book as well. Ultimately, there will no doubt be a large number of “grey” and murky situations, but I suspect that until the IRS provides better guidance (or Congress rewrites/updates the wash sale rules altogether!), in the near term the easiest “red flag” warning is simply to look at the correlation between the original investment being loss-harvested, and the replacement security; at correlations above 0.95, and especially at 0.99+, it’s difficult to argue that the securities are not ”substantially identical” to each other in performance. Basically - use common sense, and don't do anything you think would be hard to defend in an audit, but otherwise you should be okay."