The wash-sale rule is an IRS rule that disallows claiming a tax loss if you sell a security at a loss and buy the same (or a "substantially identical") security within 30 days before or after the sale. The disallowed loss isn't gone — it's added to the cost basis of the replacement shares — but it can't be used to offset gains this year. (This is general education, not tax advice — consult a professional.)
How it works
Say you sell a stock for a $1,000 loss to bank the tax benefit, then rebuy it a week later because you still like it. The wash-sale rule disallows that $1,000 loss for now; instead, it's tacked onto the new position's basis. You'll get the benefit eventually (when you finally sell the replacement without rebuying), but not on this year's return.
Why it ambushes active traders
Active traders who repeatedly trade the same tickers can trigger wash sales constantly — and the disallowed losses can stack up in ways that make your taxable gains look far larger than your actual economic profit. In a heavy-trading year, this can produce a nasty surprise: a big tax bill on gains you didn't really keep, because losses got deferred.
The wash-sale rule doesn't erase your loss — it just refuses to let you use it when you wanted to.
The takeaway
The rule is one reason active traders should understand their tax situation before year-end — and why some pursue trader tax status or a mark-to-market election that changes how this works. Section 1256 contracts (like index options) are also treated differently. This is general information, not tax advice — a qualified tax professional should guide your specific situation.