Wash sales: when your stock loss doesn't count for tax

A wash sale happens when you sell a security (such as a stock, ETF or option) at a loss and buy a "substantially identical security" within 30 days before or after the sale.

That means:

• If you sell a stock at a loss on March 15, the window runs from February 13 to April 14.

• If you buy back the same stock or an economically equivalent security within that window, the loss from the sale is not recognized for tax purposes right away.

Important:

• The loss isn't lost. It is added to the cost basis of the newly purchased shares.

• This pushes the realization of the loss into the future.

The IRS wants to stop investors from making purely tax-driven "loss sales" just to grab an instant tax benefit while their actual market position doesn't really change.

Example:
An investor could sell a stock at a loss on December 30, buy it back on January 2 and instantly have a tax-deductible loss without changing their portfolio for good. That's exactly what the wash sale rules are designed to prevent.

• Stocks: the classic wash sale cases.

• ETFs and funds: these can also count as "substantially identical", for example two ETFs tracking the same index.

• Options: buying or selling calls/puts on the same stock can trigger a wash sale.

• Bonds: possible in principle if it's the same or a nearly identical issue.

Especially tricky: purchases in a 401(k) plan or IRA can also trigger a wash sale if you sold in your regular brokerage account at the same time.

Every US broker is required to calculate wash sales automatically and show them on the tax forms. Typically these are:

• Form 1099-B: a detailed list of your sales and purchases, including a flag showing whether a wash sale applies.

• Broker statements (annual statements): these include extra information on purchase and sale prices and, where relevant, the deferred loss.

Many international brokers (such as Interactive Brokers) provide this data automatically. But:

• Not every wash sale is always caught correctly, especially with complex derivative structures or accounts in different countries.

• That's why you should always double-check your transactions.

They are reported on:

• Schedule D (Capital Gains and Losses): this is where gains and losses from investments are summarized.

• Form 8949 (Sales and Other Dispositions of Capital Assets): this is where each transaction must be listed, marked "wash sale".

Your broker usually sends the relevant data to the IRS electronically. Even so, it's your responsibility to make sure your tax return is correct.

The consequence of a wash sale is that your loss is not immediately deductible. Instead:

• The loss is added to the purchase price of the repurchased shares.

• That reduces your taxable gain when you eventually sell the new position.

In other words: the tax saving is deferred, not cancelled.

Example 1: a classic wash sale

• 15. March: you sell 100 Tesla shares at $150; the purchase price was $200. Loss = $5,000.

• 20. March: you buy back 100 Tesla shares at $160.

Result:

• The $5,000 loss is not deductible now.

• Instead, it carries over to the new position.

• The cost basis of the new Tesla shares isn't $16,000 (100 × 160) but $21,000 (16,000 + 5,000).

• If you later sell these shares at $210, your gain isn't $5,000 but only $0.

Example 2: a wash sale across year-end

• 28. December 2025: you sell 200 Amazon shares at a $10,000 loss.

• 5. January 2026: you buy back the same position.

Result:

• You cannot deduct the loss in 2025.

• Instead, it's added to the cost basis in 2026.

• This can increase your tax bill for 2025.

Example 3: a wash sale involving an IRA

• You sell Microsoft shares at a $3,000 loss in your regular brokerage account.

• You buy back the same stock in your IRA within the 30-day window.

Result:

• The loss is gone for good, because it can't be transferred into the tax-advantaged IRA.

• This is one of the harshest traps for international investors.

1. Ignoring foreign accounts: many people think only US accounts count. In fact, international brokers can matter too if they are subject to IRS reporting standards.

2. Mixing up similar ETFs: if you sell one S&P 500 ETF and buy a different one back, it may count as "substantially identical".

3. No coordination with your tax advisor: with larger portfolios and lots of transactions in particular, tracking wash sales by hand is close to impossible.

• Wait 31 days after selling at a loss before you buy back the same stock.

• Buy a similar but not identical investment (for example, a total market ETF instead of an S&P 500 ETF).

• Carefully coordinate purchases in tax-advantaged accounts (IRA, 401k) with loss sales in your regular brokerage account.

• Use professional software or check in with a US tax advisor if you trade a lot.

For many of our clients, the key point is that the wash sale rules are purely American. That means:

• If you file a tax return at home and a US return in parallel, pay close attention: a loss may be recognized in your home country but not (yet) in the US.

• This can lead to temporary differences between the tax calculations in the two countries, which in turn can affect the foreign tax credit.

The wash sale rules are a textbook example of how differently US tax law works compared with European law. For European investors with US tax obligations, this means:

• Losses can't always be used right away.

• Your broker's records are crucial.

• Mistakes can be expensive, especially with IRA accounts.

Our advice:
If you trade US securities regularly and have to file a US tax return, have your transactions professionally reviewed. It's the only way to avoid unnecessary back taxes or losing your losses for good.

We help you prepare your broker data correctly, identify wash sales and report them properly on your US tax return. For clients with complex portfolios and cross-border tax obligations, this is essential. For more depth, see our overview of the 10 best US brokers for non-resident investors and our article on how investors can save tax on US investment income.

Talk to us: we'll guide you safely through the tax jungle.

Consultation & implementation

If you'd like to find out what this means for your own situation, the best step is to book a consultation.