Wash Sale Rule
Definition
An IRS rule that disallows a tax deduction for a capital loss if you purchase a "substantially identical" security within 30 days before or after the sale. The disallowed loss is added to the cost basis of the replacement security, deferring (not eliminating) the tax benefit. The rule applies to stocks, bonds, mutual funds, ETFs, and options. It does not currently apply to cryptocurrency, though legislation has been proposed to close this gap.
Example
You sell 100 shares of XYZ stock at a $2,000 loss on December 15, then buy 100 shares of the same stock on January 5. The wash sale rule disallows the $2,000 loss deduction; instead, it is added to your basis in the new shares.