I have been reading the wash-sale rule. I get the concept, but I do not get why this rule exist or needed. To me, in the end, a person would pay the same amount of taxes with or without create artificial losses.

Case 1 (trigger wash-sale rule)

Day 1: Buy 10 ABC stocks for $10 per share
Day 2: Sell 10 ABC stocks for $5 per share
Day 3. Buy 10 ABC stocks for $5 per share
Day 4. Sell 10 ABC stocks for $20 per share

In case 1, even though it looks like this person created artificial losses on day 2 ($-50), but since he bought at a lower cost basis on day 3, he would need to pay more taxes on the sell on day 4 ($150). The taxes this person would pay on in total is -50 + 150 = 100.

Case 2 (does not trigger wash-sale rule)

Day 1: Buy 10 ABC stocks for $10 per share
Day 4. Sell 10 ABC stocks for $20 per share

In case 2, this person did not trigger the wash-sale rule, and only buy at day 1, and sell at day 4 ($100). The taxes this person would pay on in total is 100.

In these 2 cases, they pay the same amount of taxes on. Even though, case 1 looks like he claimed an artificial losses, but if you look at the bigger picture, he would need to pay more taxes on his second sell than if he would have not sell on day 2. In the end, the math adds up to the same. I didn't get why IRS has this wash-sale rule. Am I missing something?

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    The difference is when Day 4 happens in a different tax year than Days 2 and 3. It could even be years later. – The Photon Mar 12 '19 at 5:20
  • @ThePhoton Even it's the years later, the taxes adding up remain the same. – user926958 Mar 12 '19 at 5:25
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    Not if you consider time value of money. $10 right now is more valuable than a promise to pay $10 at some (undefined, in this case) time in the future. – The Photon Mar 12 '19 at 5:25
  • A more important consideration is that the loss I generate today can be used to offset ordinary income (up to $3000/year with carry-forward) which might be taxed at 25% or higher, while the gain I eventually take may be long-term and taxed at capital-gains rates of 10% or 15%. Tax on $1 is not always the same depending on the income source. By creative (and completely legal) use of this rule, I can shift some of my income to a much lower tax rate and save myself money. The wash sale rule forces me to take some risk (or use capital) while doing this. – Istanari Mar 12 '19 at 17:36

Your wash sale example only has an impact if Day 3 and/or Day 4 are in January of the following year. If this all happened in June, there is no impact, you are right. If Day 3 or 4 are in January then the loss is disallowed for the prior tax year and is pushed to the next tax year or whatever tax year the open position is disposed of. A loss this year is typically worth more than a loss next year to the investor, and tax revenue now is typically more valuable than tax revenue later to the IRS.

If the losses were allowed with no offsetting gain in the current year, they could be used to offset ordinary income (up to $3,000 and rest carried over), while maintaining the same position.

The wash-sale rules don't prevent people from harvesting losses strategically, they just make it so you can't do it without risk of the market changing. They really do just limit the artificial losses.


The wash sale rules exist to discourage people from selling a security solely for the tax loss when they fully intended to continue holding that security.

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    I think the question is why they want to discourage it. – glibdud Mar 12 '19 at 2:46
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    The IRS doesn't want allow tax losses if you rebuy within 30 days. That's all. It's got nothing to do with market stabilization, this has everything to do with booking a loss when you buy right back in to the same security. – quid Mar 12 '19 at 3:03
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    @user926958 which you do not accept? Neither of your examples even include a time period longer than the wash sale 30 days. I've had plenty of securities over the years that I wanted to continue holding, but on December 31 they were at a paper loss. But for the wash sale rules I would sell that security, take the loss for the year, and immediately buy it back. The wash sale rules would force me to top up my cost basis and negate my tax benefit from the loss, so I don't do it, because there's no point. – quid Mar 12 '19 at 3:09
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    @KeithKnauber wash sale is about taxes not market stability. There are HFT firms transacting hundreds and thousands of times a day. All kinds of superfluous things are attached to bills when they're in congress. Wash sale rules are about taxes, that's all. – quid Mar 12 '19 at 3:30
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    @Keith Knauber. The intent of the wash sale rule is to prevent investors from churning their positions and claiming the benefit of short-term losses. They want revenue now not later.Discouraging short-term speculation and market stabilization is not the intention or responsibility of the IRS. If Randolph and Mortimer (nice reference) are buying large blocks of shares from each other, share price is not going to move since there is no net volume order imbalance. If the volume is imbalanced and each 100k share lot drives price down further, the buyer is losing money. It's not a winning plot. – Bob Baerker Mar 12 '19 at 11:23


"The wash sale rules of Section 1091 are intended to limit the ability of taxpayers to generate “paper” losses. Taxpayers should be aware that the IRS is taking an expansive view of the application of these rules and the use of related entities to avoid the wash sale rules will be scrutinized."


"However, the IRS relied, exclusively, on the decision in Security First National Bank of Los Angeles, where a taxpayer sold bonds to a corporation of which the taxpayer was the sole shareholder and on the same day the corporation transferred the bonds to a trust over which the taxpayer had absolute dominion and control."

Furthermore, here's an example court case involving wash sales that were used to destabilize an illiquid market:


Just because a law is difficult to enforce doesn’t mean it’s not the law. https://www.law.cornell.edu/uscode/text/7/6c

Tax loss harvesting, on the other hand, is a perfectly legal and widely used strategy.

It is legal to sell (for example) an index ETF to harvest a tax loss, and immediately buy different ETF(s) that represent the same index.

  • So your second link is a reversal of a trading commission's ruling against someone named Manning Stoller for wash sales in the context of commodities futures where wash sales in those markets are actually disallowed, it's not simply a tax issue in the context of commodities futures markets as there are concerns of actual physical deliveries and the link you provided is a reversal of the decision anyway. – quid Mar 12 '19 at 5:12
  • Just because a law is difficult to enforce doesn’t mean it’s not the law. law.cornell.edu/uscode/text/7/6c – Keith Knauber Mar 12 '19 at 13:26
  • I didn't make any sort of comment about whether or not something was the law. I'm saying you have only an extremely light grasp of what's going on and used an appellate reversal as a citation to prove your point. This question is about the taxation of wash sales from the perspective of the IRS, this is the context of the lions share of discussion surrounding wash sale rules. The IRS rules about wash sales have zero to do with market stability. You found a rule in commodities markets that also uses the term wash sale and seem to think they are the same thing. They're not. – quid Mar 12 '19 at 17:31

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