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IRS rule that disallows a tax loss deduction if you buy a substantially identical security within 30 days before or after selling at a loss. Applies to options on the same underlying.
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Key takeawayClose a losing SPY put and sell another SPY put within 30 days? The loss is deferred. Track your trades carefully or let your broker's tax software handle wash sale adjustments.
💡 Why It Matters
Wash sale rules can defer your tax loss if you re-enter a substantially identical position within 30 days. For active premium sellers who trade the same names repeatedly, wash sales are almost unavoidable.
⚙ How It Works
If you sell a position at a loss and buy a substantially identical security within 30 days before or after, the loss is disallowed and added to the cost basis of the new position. The loss isn't gone — it's deferred.
📋 Example
Close a SPY $570 put at a $200 loss on March 15. Sell a new SPY $565 put on March 20. The IRS considers these substantially identical — the $200 loss is deferred and added to the new put's cost basis.
⚠ Common Mistakes
Thinking wash sales eliminate your loss. They defer it. The loss is added to the replacement position's cost basis and recognized when that position closes. Also: wash sales can create tax surprises across year-end.
❓ FAQ
What is Wash Sale Rule?
IRS rule that disallows a tax loss deduction if you buy a substantially identical security within 30 days before or after selling at a loss. Applies to options on the same underlying.
Why does Wash Sale Rule matter for premium sellers?
Close a losing SPY put and sell another SPY put within 30 days? The loss is deferred. Track your trades carefully or let your broker's tax software handle wash sale adjustments.
How does Wash Sale Rule work?
If you sell a position at a loss and buy a substantially identical security within 30 days before or after, the loss is disallowed and added to the cost basis of the new position. The loss isn't gone — it's deferred.
What are common mistakes with Wash Sale Rule?
Thinking wash sales eliminate your loss. They defer it. The loss is added to the replacement position's cost basis and recognized when that position closes. Also: wash sales can create tax surprises across year-end.
Related Terms
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Adjusted Option
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American-Style Option
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