For educational purposes only; not investment, tax, or legal advice. Investing may result in loss.
Direct answer
For U.S. federal income-tax purposes, a current loss can be disallowed when a taxpayer sells or trades stock or securities at a loss and, during the period from 30 days before through 30 days after that disposition, acquires substantially identical stock or securities or a contract or option to acquire them. IRS Publication 550 also says the rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities. Under 26 U.S.C. § 1091, cash settlement alone does not take such a contract or option outside the rule.
This is a 61-day review window, not merely 30 days after the loss trade. The rule is tied to U.S. federal tax status and the transactions, not simply to an option’s listing venue, currency, or underlying. State and non-U.S. rules require separate review. Whether two options, or an option and stock, are substantially identical depends on the particular facts and circumstances; matching the underlying, strike, expiration, or Delta is not a universal safe harbor.
How the rule changes tax records
For replacement property in a taxable account, the disallowed loss is generally added to its cost basis, which postpones recognition until a later taxable disposition:
adjusted replacement basis = replacement cost + disallowed loss
The replacement property’s holding period generally includes the holding period of the disposed property. If only part of the quantity is replaced, matching can produce only a partial disallowance. Purchases by a spouse or a corporation the taxpayer controls can also matter, so activity across brokers and accounts must be reviewed together.
If an individual sells stock or securities at a loss in a taxable account and causes that individual’s IRA or Roth IRA to buy substantially identical stock or securities within the window, IRS Revenue Ruling 2008-5 disallows the loss without increasing the IRA’s basis. In that situation, the loss is not simply deferred into the retirement account.
Broker reporting is narrower than the taxpayer’s legal test. Publication 550 says Form 1099-B wash-sale reporting generally covers specified covered securities bought in the same account with the same CUSIP, but an unreported wash sale is not thereby deductible. The Form 8949 instructions use code W and a positive adjustment in column (g) for a nondeductible wash-sale loss.
Example
Assume a taxpayer sells a long option for $1,000 after paying $3,000, realizing a $2,000 loss. Ten days later, a replacement option costs $1,500. If, after reviewing the contracts and circumstances, the replacement is substantially identical and the full loss is disallowed, its adjusted basis is:
$1,500 + $2,000 = $3,500
The arithmetic does not determine whether the options are substantially identical; that classification is the key tax judgment. If only part of the disposed position is replaced, only the matched part may be affected. A qualifying acquisition before the loss trade can also trigger the rule, so reviewing only later trades is insufficient.
Practical risks and scope
- Keep trade dates, tax lots, quantities, option terms, exercises, assignments, expirations, and transfers for every relevant account.
- Review stock-to-option, option-to-stock, rolls, spouse accounts, controlled corporations, and taxable and IRA/Roth IRA activity rather than relying on one broker screen.
- Trace stock received or delivered through exercise or assignment; the resulting property and transaction dates can affect the analysis.
- Straddle, constructive-sale, Section 1256, dealer, employee-option, short-sale, and other special rules can supersede or change the result.
- A different strike or expiration does not automatically avoid the rule; no general option-to-option safe harbor is stated in the cited guidance.
- Tax software may not reconcile brokers or decide whether economically related contracts are substantially identical.
- Federal law, state treatment, tax year, taxpayer status, and account ownership matter. Use current-year materials and a qualified U.S. tax professional for an actual return.
Common misconceptions
“Waiting 30 calendar days after the sale is the entire test.” Acquisitions in the 30 days before the loss trade also count, and the actual trade dates must be checked.
“No broker adjustment means no wash sale.” Broker information reporting can be narrower than the taxpayer’s obligation.
“A disallowed loss is always recovered later.” An IRA or Roth IRA purchase covered by Revenue Ruling 2008-5 does not receive the basis increase.