The Wash Sale Rule (U.S.)

The Wash Sale Rule is a provision in U.S. tax law (IRC §1091). In a word, it's a device to block "the sleight of hand of pocketing only the loss for tax purposes while keeping the position intact."

The content is this. When you try to sell a losing security to get a tax deduction, if within 30 days each before and after that sale date (a total of 61 days including the sale date) you buy back the "same or substantially identical" security, that loss is not recognized for tax purposes.

For example, if you sold stock A at a 1 million won loss and bought A again 20 days later, that loss is excluded from that year's tax calculation. Buying it in advance 30 days before the sale is also caught. That's why it's called the "61-day window before and after."

This is a widely misunderstood part, but being caught by the wash sale doesn't mean that loss vanishes forever.

The disallowed loss is added to the "cost basis of the newly bought replacement stock." So it's reflected when you later sell that replacement stock. In other words, the loss isn't gone but "pushed back (deferred)."

For example, if a 1 million won loss is denied by the wash sale, the cost of the repurchased stock rises by that much, so it comes back when you eventually sell—reducing your gain or enlarging your loss. It's just that the tax timing is deferred.

Because of this rule, when doing year-end "tax-loss harvesting" in the U.S., people sometimes switch to a different ETF that's similar but not identical to avoid the 30-day rule.

Here's an important difference for Korean investors. Korean tax law has no provision equivalent to the wash sale.

So in theory, selling a losing overseas stock within the year to reflect it in gain-loss netting (combining gains and losses to reduce tax) and then immediately buying the same stock back is not blocked either. For reference, netting of transfer gains and losses on domestic/overseas stocks has been allowed for transfers from 2020 onward.

However, "no rule" absolutely does not mean "do it freely." There are a few traps.

First, the more you buy and sell, the more trading commissions, securities transaction tax, and currency-exchange costs keep going out. You could save a few coins of tax and lose more in trading costs. Second, U.S. stocks are processed on a settlement-date basis, so selling near year-end can have settlement slip into the next year and not be booked in "this year's gains and losses."

As "seohak-gaemi" (Koreans investing in U.S. stocks) increase, occasions to encounter the U.S. tax concept of the wash sale have grown. If you're in a situation of trading directly through a U.S. brokerage account or having to file U.S. taxes, you must know this rule.

Conversely, if you invest in overseas stocks through a Korean brokerage and file capital gains tax in Korea, the wash sale rule itself does not apply. Instead you follow Korean-style rules of gain-loss netting and the 2.5 million won annual basic deduction.

The key lesson is that "tax rules differ by country." Completely different rules apply depending on where you trade and where you file. And in any case, frequent trading creates invisible costs—that's common to all. It's also the reason this site shows the results of holding for a long time and steadily.