Brian Lee
Jul 02, 2025
I often find the wash-sale rule confusing. However, understanding it is essential for using tax loss harvesting effectively. I have two tips to make the wash-sale rule easier to navigate.
A wash sale happens when you sell a security for a loss and buy the same or a “substantially identical” one within 30 days. The IRS disallows the loss and adds it to the cost basis of the new position.
Suppose you sell 100 shares of TSLA on July 1 at a loss. If you repurchase TSLA on July 10—within the 30-day window—the IRS will disallow the loss from the July 1 sale. To preserve the ability to claim the loss, you would need to wait until at least August 1 before buying TSLA again.
The disposal method determines which specific tax lots are sold when you liquidate a position. A tax lot is a record of a particular purchase of a security, including the number of shares, the date of purchase, and the price paid per share. If you purchase the same stock multiple times, each transaction creates a separate tax lot.
Your broker typically allows you to choose how these lots are selected when you sell. Common disposal methods include FIFO (first in, first out), LIFO (last in, first out), and low-cost. I recommend using the low-cost method.
The low-cost disposal method prioritizes selling shares with the lowest cost basis—the original purchase price of a security, including commissions or fees. By selling the lowest-cost shares first, this method maximizes your capital gains on each sale.
I use the low-cost method because it simplifies tax tracking, especially when the primary goal is to take profits. Since I’m usually realizing gains, the math is clean and predictable unless I deliberately choose to realize a loss.
Using this method consistently throughout the year also reduces exposure to wash-sale complications. When I decide to harvest losses—typically near year-end—I start from a clean slate with few or no realized losses that might be disqualified under the wash-sale rule.
The biggest lesson I’ve learned is that a diversified portfolio naturally provides opportunities to realize both gains and losses throughout the year. When you obsess over tax loss harvesting, you may end up locking in a loss and missing out on a strong rebound or better profit-taking opportunity shortly after. In most cases, it’s better to ignore the wash-sale rule and focus on taking more profit, especially when trading is going well.
However, you must be vigilant about trades across December and January. While the tax year ends in December, the wash-sale rule applies to any repurchase of a substantially identical security within 30 calendar days before or after a sale at a loss. This rule straddles the tax-year boundary and can negate your efforts to reduce your tax burden.
Suppose you sell AMD on December 5 at a loss, hoping to claim that loss to offset gains. Then you re-enter AMD on January 2. Even though you bought the replacement in the next tax year, the loss you realized in December will be disallowed under the wash-sale rule. That means you won’t get the tax deduction you expected, and you may have no further chance to realize enough losses before year-end.
To avoid these pitfalls, I focus on realizing losses in November. This provides a buffer before year-end to re-enter positions if market opportunities arise. During this time, I closely monitor my realized gains and losses.
When trading high-volatility stocks (e.g., those with high HV30 values), there are plenty of chances to realize losses and shift to more stable positions as the year winds down. Being proactive and disciplined in this period makes tax loss harvesting more effective without disrupting your overall strategy.
Always keep a short list of substitute stocks that you can rotate into after harvesting a loss. These substitutes should have similar exposure or performance characteristics but must not be considered “substantially identical” by IRS standards.
For example, I trade AMD frequently because it has been consistently profitable for me, while I rarely trade AAPL. If I plan to realize losses from AMD, I will sell it in November and use AAPL as a substitute. This allows me to preserve market exposure while remaining compliant with the wash-sale rule. I may hold AAPL through year-end and return to AMD in the new tax year.
At the time of writing, AAPL trades at roughly twice the price of AMD. If I sell 100 shares of AMD, I would purchase approximately 50 shares of AAPL to maintain a comparable dollar allocation. This is where the concept of “asset replacement” becomes useful: you want to exchange one asset for another with equal or better earning potential.
However, there are trade-offs. By halving the share count, you may lose the ability to trade covered calls, which is the core of my strategy. Depending on your objectives, you might prefer replacing AMD with a lower-priced stock that still offers options liquidity and allows for multiple covered call contracts.
In some cases, NVDA could be a logical substitute for AMD based on price and sector exposure. But in my portfolio, I frequently trade both AMD and NVDA, so rotating between them would trigger wash-sale issues. This is not a major setback—AAPL serves here as an illustrative example. The key is to evaluate substitutes based on valuation, volatility, options availability, and your own trading history.
We are now ready to discuss how I buy, sell, and roll covered calls. Weekly covered calls generate a continuous stream of realized gains and losses, making them a dynamic part of an active trading strategy. With a solid understanding of tax loss harvesting and the wash-sale rule, the benefits of trading covered calls—both for income and for tax efficiency—should become apparent in the next article.