Most seasoned investors know the wash sale rule. But far fewer realize how easy it is to unintentionally increase your tax bill by thousands – especially when you’re tax-loss harvesting in December.
Let’s walk through an example that looks smart at first glance, but quietly creates a tax-time mess.
A “Smart” Trade With a Hidden Tax Surprise
Here’s the scenario:
- You buy a stock in November 2025 for $10,000.
- By December, the stock drops to $5,000, and you sell to realize the loss.
- A few days later, still in December 2025, you buy it back for $6,000.
You may believe you’ve locked in a $5,000 capital loss for your 2025 taxes. Unfortunately, that’s not how the IRS sees it.
The Wash Sale Rule: Not Just About Disallowing Losses
Because you repurchased the same security within 30 days of selling it at a loss, this triggers the wash sale rule. The key effect is this:
Your loss isn’t gone, but it’s no longer usable in the current tax year.
Instead, the disallowed $5,000 loss is added to the cost basis of your repurchased stock. So now, your new cost basis is:
$6,000 (repurchase price) + $5,000 (disallowed loss) = $11,000
That means to realize the $5,000 loss in the future, you’ll have to sell this new position at a lower price than $11,000.
The Real Problem: Crossing Tax Years
Now imagine you hold that new $6,000 position into January 2026, and sell it then for the same $6,000.
You just triggered a realized capital loss of $5,000 — but in 2026, not in 2025.
That’s where the trap gets set.
Suppose you had significant capital gains in 2025. You wanted to offset those gains with year-end loss harvesting. But by violating the 30-day window, you just deferred your usable loss to the next year.
Now your 2025 gains go fully taxed, and your $5,000 loss only applies to 2026. If you don’t have matching gains in 2026, you’re now subject to the IRS limit:
Only $3,000 of capital losses can be deducted against ordinary income per year.
The rest gets carried forward.
So not only did you miss offsetting your 2025 gains, you now have a split loss: $3,000 in 2026, and a carryforward of $2,000 into future years.
Important Clarification: The Loss Isn’t Gone, Just Deferred
The disallowed loss is not eliminated. It’s built into your new cost basis. When you eventually sell that position without triggering another wash sale, you’ll receive the full tax benefit.
But here’s the catch: timing matters. If you’re sitting on large realized gains in one year, deferring losses (even temporarily) can significantly increase your tax bill that year.
Avoiding the Trap
This mistake typically hits at year-end, when people rush to harvest losses in December and forget the 30-day wash window spans into the next tax year.
Here’s how to protect yourself:
- Wait 31 days before repurchasing a sold security, especially if you’re trying to offset gains in the current year.
- Use similar (but not identical) securities to maintain market exposure. Example: Sell SPY, buy VOO or SCHX.
- Plan your trades earlier in the year to avoid getting pinned by calendar boundaries.
- Track all lots and trades if you’re doing manual loss harvesting.
- Coordinate with your CPA or wealth advisor before December 15, not after the fireworks.
Key Takeaways
- The wash sale rule doesn’t eliminate your loss, it defers it by adjusting your cost basis.
- Repurchasing the same stock within 30 days can push your loss into the next tax year.
- If your gains and losses fall into different years, you could pay significantly more in taxes.
- Only $3,000 of capital losses can be deducted against ordinary income if you have no capital gains.
- Strategic timing is just as important as the loss itself when harvesting.
References:
- IRS Pub 550 – Wash Sales Section
- IRS Topic No. 409 – $3,000 per year limit on deducting capital losses against ordinary income if no gains are present in that tax year.