This article reflects federal IRS rules and general state conformity as of June 2026 and covers tax year 2025 (the 2026 filing season). Tax law changes — confirm current figures with the IRS or a licensed professional before you file.
Quick Answer
Yes — selling options can trigger a wash sale. For tax year 2025, the wash sale rule under Section 1091 applies to options. If you sell an option at a loss and buy a “substantially identical” security — including another option — within 30 days before or after, the IRS disallows the loss.
Options sit squarely inside the wash sale rule, even though many traders assume they are exempt. The rule covers stocks, bonds, mutual funds, ETFs, and options on those securities, so an option loss can be deferred just like a stock loss, and the disallowed amount rolls into the cost basis of your replacement position.
The stakes are real. The wash sale rule can quietly erase a loss you were counting on to offset gains, leaving you with a bigger tax bill than your trading statements suggest — and with active option trading, you can trip the rule dozens of times in a single tax year without realizing it.
- 📌 How the wash sale rule actually applies to buying and selling options, in plain English.
- 💰 Three fully worked dollar examples showing exactly how a disallowed loss moves into your cost basis.
- ⚠️ The “substantially identical” trap — when a new option counts as a replacement and when it does not.
- 🧾 How to report wash sales on Form 8949 and Schedule D, including the code “W” adjustment.
- 🛡️ Seven costly mistakes and a clear “what to do next” plan to protect your deductions.
What the Wash Sale Rule Is
The wash sale rule is a tax law that stops you from claiming a loss when you sell a security and quickly buy back the same or a nearly identical one. It lives in Internal Revenue Code Section 1091 and is explained for investors in IRS Publication 550. The rule exists to block “fake” losses — selling just to harvest a deduction while keeping the same economic position.
Here is how the timing works. A wash sale happens when you sell a security at a loss and buy a substantially identical security within 30 calendar days before or after that sale. That creates a 61-day window: 30 days before, the sale day, and 30 days after, as Charles Schwab explains. Most traders forget the “before” half and only watch the days after the sale.
The consequence is not that you lose the deduction forever. The disallowed loss is added to the cost basis of the replacement security, so you recover it later when you finally sell that replacement in a non-wash transaction. The holding period of the sold security also carries over to the new one. In short, the rule defers your loss rather than deleting it — but the timing can hurt if the deferral pushes the benefit into a year you did not plan for.
A common misconception is that the rule only matters at year-end. It applies all year long. The reason people focus on December is tax-loss harvesting season, but a wash sale in March is just as disallowed as one in December.
What you should do about it: track every loss sale and watch the 61-day window around it. If you want to keep the deduction this year, do not repurchase a substantially identical position inside that window.
Why Options Are Covered
Many option traders believe the wash sale rule is a “stocks only” problem. It is not. The rule explicitly reaches options. Publication 550 and Section 1091 treat a contract or option to acquire or sell stock or securities as property that can be substantially identical to the underlying security or to another option.
There are two directions to watch, and both can bite. First, an option loss can be washed by buying a replacement. If you close an option at a loss and buy a substantially identical option (or the underlying stock) within the window, the loss is disallowed. Second, an option purchase can trigger a wash sale on a stock loss. If you sell stock at a loss and then buy a call option on that same stock within 30 days, the call is treated as acquiring a substantially identical position, so the stock loss is washed.
The consequence is the same as with stock: the disallowed loss attaches to the replacement option or share, and your deduction is pushed to a later date. With options expiring weekly or monthly, the chance of an accidental replacement inside the window is high.
A frequent misconception is that selling (writing) an option to open a position cannot create a wash sale. Writing options has its own gain-and-loss treatment, but if a written option is closed at a loss and you re-establish a substantially identical position, the wash sale rule can still apply. The IRS looks at the economic substance, not the label.
What you should do about it: treat options exactly like stock for wash sale purposes. Before you re-enter any trade after a loss, ask whether the new position is substantially identical to the one you just closed.
The “Substantially Identical” Question for Options
This is the hardest part of the rule, because the IRS has never published a bright-line test for options. Publication 550 says whether securities are “substantially identical” depends on the facts and circumstances. For options, that means the answer turns on the underlying stock, the strike price, the expiration date, and the type (call vs. put).
A few principles are widely accepted. An option to buy stock and the stock itself can be substantially identical, so selling the stock at a loss and buying a deep in-the-money call can wash the loss. Two call options on the same stock with the same strike and expiration are clearly substantially identical. Calls and puts on the same stock are generally not substantially identical to each other, because a call and a put are economically opposite bets.
Where it gets murky is changed terms. A call with a different strike price or a far-off expiration date may not be substantially identical to the one you sold — but there is no IRS rule that says how different is “different enough.” A deep in-the-money call behaves almost exactly like the stock, so the IRS is more likely to view it as a replacement than an out-of-the-money call with a distant expiration.
A dangerous misconception is the “just change the strike price” myth. Traders assume that shifting the strike by a dollar or rolling out a week guarantees safety. It does not. The further your new position moves from the old one in economics, the safer you are — but small tweaks to a near-the-money option are risky.
What you should do about it: when in doubt, change the underlying, switch from a call to a put, or simply wait 31 days before re-entering a substantially identical option. If a position is large, ask a CPA before relying on a strike or expiration change.
Section 1256 Contracts — A Key Exception
Not every option is exposed to the wash sale rule the same way. Section 1256 contracts get special treatment. These include broad-based index options such as options on the S&P 500 index (SPX) and the Nasdaq-100 index (NDX), plus regulated futures and options on futures, as Schwab describes.
Section 1256 contracts are “marked to market” at year-end. The IRS treats them as if you sold them on December 31 at the closing price, so gains and losses are recognized automatically. Because the position is deemed sold each year, the ordinary wash sale deferral generally does not apply in the same way to these contracts.
They also receive the 60/40 rule: 60% of the gain or loss is treated as long-term and 40% as short-term, regardless of how long you held the contract. For tax year 2025, with the top ordinary rate at 37% and the top long-term capital gains rate at 20%, that blended treatment can lower the rate on trading profits. This favorable treatment is one reason index options are popular with active traders.
A common misconception is that all options qualify as Section 1256 contracts. They do not. Options on individual stocks and on narrow-based indexes are equity options — fully subject to the regular wash sale rule. Only broad-based index options and listed futures-style contracts get 1256 treatment.
What you should do about it: separate your equity options from your index options when you do tax planning. Mark-to-market 1256 positions report on Form 6781, not the standard Form 8949 path, and they are not where your wash sale risk lives.
Which Situation Applies to You?
The right answer depends on what you traded and what you bought next. Use this guide to find your case, then read the matching example below.
- You sold a stock at a loss and bought a call on the same stock within 30 days: the stock loss is washed by the call. See Maria’s example.
- You closed an option at a loss and re-bought the same or a nearly identical option within 30 days: the option loss is washed. See David’s example.
- You sold an option at a loss and bought a call with a very different strike and a much later expiration: it may not be substantially identical, but it is fact-specific.
- You traded broad-based index options (SPX, NDX): you are in Section 1256 territory and the regular wash sale deferral generally does not apply.
- You triggered a wash sale inside an IRA by repurchasing there: the loss is permanently lost, not just deferred. See Priya’s example.
Three Worked Examples With Real Numbers
Below are the three most common ways selling options creates a wash sale, each with the math shown step by step. Each table has exactly two columns: the trade and its tax result.
Example 1 — Maria washes a stock loss by buying a call
Maria owns 100 shares of a tech company bought at $60 per share, a $6,000 cost. On March 3, 2025, she sells all 100 shares at $50, taking a $1,000 loss. On March 20, 2025 — 17 days later — she buys one in-the-money call option on the same stock because she expects a rebound. The call is treated as acquiring a substantially identical position.
| Maria’s Move | Tax Result for 2025 |
|---|---|
| Sells 100 shares at a $1,000 loss on March 3 | Loss is real but at risk of being washed |
| Buys a substantially identical call 17 days later | $1,000 loss disallowed under the wash sale rule |
| Disallowed loss is added to the call’s cost basis | She recovers the $1,000 when she closes the call in a clean trade |
Maria cannot deduct the $1,000 in 2025. Instead, the $1,000 increases the cost basis of her call. If she later closes the call without triggering another wash sale, the deferred loss reduces her gain or increases her loss at that point.
Example 2 — David washes an option loss by re-buying the same call
David buys one call option on a stock for $500 on June 2, 2025. The stock drops, and on June 10, 2025, he sells the call for $200, a $300 loss. On June 18, 2025 — eight days later — he buys an identical call (same strike, same expiration) for $260 because he still believes in the trade.
| David’s Move | Tax Result for 2025 |
|---|---|
| Sells the call for a $300 loss on June 10 | Loss is real but inside the danger window |
| Buys an identical call 8 days later for $260 | $300 loss disallowed as a wash sale |
| Adds $300 to the new call’s $260 cost | New call’s basis becomes $560 |
David’s $300 loss is deferred, not gone. His new call now has a $560 cost basis instead of $260. If he sells that call for $400, he reports a $160 loss ($400 minus $560), recovering the deferred amount in a clean trade.
Example 3 — Priya permanently loses a loss via her IRA
Priya sells a stock option in her taxable account at a $2,000 loss on October 7, 2025. Eleven days later, on October 18, 2025, she buys a substantially identical call inside her Roth IRA. The IRS has ruled in Revenue Ruling 2008-5 that a repurchase in an IRA triggers the wash sale rule — and the disallowed loss cannot be added to the IRA’s basis.
| Priya’s Move | Tax Result for 2025 |
|---|---|
| Sells option at a $2,000 loss in taxable account | Loss is real before the IRA purchase |
| Buys a substantially identical call in her Roth IRA | $2,000 loss disallowed as a wash sale |
| IRA basis cannot absorb the disallowed loss | The $2,000 deduction is permanently lost |
This is the worst-case outcome. In a normal wash sale the loss is deferred; in an IRA wash sale the loss vanishes entirely because there is no taxable basis to carry it into. Priya never recovers the $2,000.
How to Report a Wash Sale
Wash sales flow through Form 8949 and Schedule D. Your broker reports wash sales on your Form 1099-B for positions in the same account, but brokers are not required to track wash sales across different accounts or between very similar (but not identical) securities, so the burden often falls on you.
On Form 8949, you list the sale, then enter code “W” in column (f) to flag a wash sale. In column (g), you enter the disallowed loss as a positive adjustment, which reduces the loss you can claim. The net result carries to Schedule D, then to your Form 1040.
The deadline is your normal tax filing deadline — generally April 15, 2026, for tax year 2025 returns, or October 15, 2026, if you file an extension. Missing or misreporting a wash sale can trigger an IRS notice and the 20% accuracy-related penalty described in Publication 550 for a substantial understatement of tax.
What you should do about it: reconcile your 1099-B against your own trade log, especially if you trade the same stock and its options across multiple accounts. If you are an active trader, software that tracks wash sales across accounts is worth the cost.
Mistakes to Avoid
Each error below carries a specific consequence, so watch for all of them.
- Ignoring the 30 days before the sale: you can wash a loss with a purchase you already made, not just a later one — and the loss is disallowed.
- Assuming options are exempt: option losses are fully subject to the rule, so the deduction you counted on disappears for the year.
- Relying on the “change the strike” myth: a small strike or expiration tweak on a near-the-money option may still be substantially identical, washing your loss.
- Repurchasing in an IRA: the loss is permanently lost, not merely deferred, which is the costliest outcome of all.
- Trading the same name across spouse or joint accounts: a purchase by your spouse can trigger the rule, and the loss is disallowed.
- Trusting the 1099-B blindly: brokers do not track wash sales across accounts, so you can understate income and draw a penalty.
- Forgetting basis carryover: failing to add the disallowed loss to the replacement’s basis means you double-pay tax by never recovering the loss.
Do’s and Don’ts
- Do wait at least 31 days before re-entering a substantially identical option after a loss, because that breaks the window and frees the deduction.
- Do keep a dated trade log, because you need it to prove which losses are clean and which are washed.
- Do add every disallowed loss to the replacement’s cost basis, because that is how you eventually recover it.
- Do separate Section 1256 index options from equity options, because they follow different rules and reporting forms.
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Do consult a CPA for large or complex positions, because the “substantially identical” test is fact-specific and costly to get wrong.
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Don’t repurchase a washed security inside an IRA, because the loss is lost forever.
- Don’t assume December is the only risky month, because the rule applies to every loss sale all year.
- Don’t treat a call and a put as interchangeable for safety, because they are different but a deep ITM call can still mirror the stock.
- Don’t rely on tiny strike changes to dodge the rule, because near-identical economics still trigger it.
- Don’t ignore your spouse’s trades, because related-party purchases can wash your loss.
Pros and Cons of the Wash Sale Rule for Option Traders
- Pro: The loss is usually deferred, not destroyed, so you eventually get the deduction back through basis carryover.
- Pro: The holding period carries over, which can help you reach long-term treatment on the replacement.
- Pro: Section 1256 index options sidestep the usual deferral, giving active traders a cleaner result.
- Pro: Clear rules let careful traders harvest losses on purpose by waiting out the 61-day window.
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Pro: Basis adjustments prevent you from being taxed twice on the same economic loss over time.
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Con: The rule defers a loss you may have needed this year to offset gains.
- Con: The “substantially identical” test for options is vague and creates real uncertainty.
- Con: Active option trading can trigger dozens of accidental wash sales in a year.
- Con: IRA repurchases convert a deferral into a permanent loss with no recovery.
- Con: Cross-account tracking is your job, raising the risk of an IRS notice and a 20% penalty.
Federal vs. State Treatment
The wash sale rule starts as federal law, but state treatment matters too. The table below shows the baseline split for tax year 2025.
| Jurisdiction | How the Wash Sale Rule Applies |
|---|---|
| Federal | Fully applies to options under Section 1091; loss deferred and added to replacement basis |
| Most states with income tax | Conform to the federal capital gains figure, so the washed loss carries through automatically |
| No-income-tax states (e.g., Florida, Texas) | No state tax on the gain or loss, so the rule has no state-level effect |
Most states that tax income use your federal adjusted gross income or federal capital gain as a starting point, so a federally disallowed loss is already baked into the number your state taxes. A few states have their own adjustments and decoupling provisions, so confirm with your state’s department of revenue if you trade heavily. States without an income tax simply do not tax the gain, so the federal wash sale outcome does not change your state bill.
What you should do about it: confirm whether your state conforms to the federal capital gains figure for 2025. If you live in a no-income-tax state, you only need to manage the federal rule.
When to Call a Professional
This article is educational and is not a substitute for advice from a licensed professional about your specific situation. Most casual traders can manage the wash sale rule with a calendar and a trade log. But some situations are complex enough to warrant help.
Call a CPA or tax attorney if you trade options actively across multiple accounts, if you triggered a possible wash sale inside an IRA, if you are unsure whether two option positions are substantially identical, or if you received an IRS notice. Professional help here typically involves reconciling your 1099-B, recalculating your basis, and amending a return if needed. The cost is usually far less than the disallowed loss or penalty at stake.
What to Do Next
Follow these steps in order to protect your deductions for the 2025 tax year.
- Pull your full-year trade history and every Form 1099-B from your brokers.
- Flag each loss sale, then check the 61-day window around it for any substantially identical purchase, including options and IRA trades.
- For each wash sale, add the disallowed loss to the replacement position’s cost basis and note the carried-over holding period.
- Report the sales on Form 8949 with code “W” and the adjustment, then carry totals to Schedule D.
- File by April 15, 2026, or October 15, 2026, with an extension, and contact a CPA before filing if any wash sale is large, crosses accounts, or involves an IRA.
FAQs
Does selling an option always trigger a wash sale?
No. A wash sale only happens when you sell at a loss and buy a substantially identical security within 30 days before or after. A sale at a gain, or with no nearby repurchase, is not a wash sale.
Are options subject to the wash sale rule?
Yes. For tax year 2025, the rule covers options on stocks and securities under Section 1091. An option loss can be washed, and buying an option can wash a stock loss.
Does buying a call after selling a stock at a loss cause a wash sale?
Yes. Buying a call on the same stock within 30 days is treated as acquiring a substantially identical position, so the stock loss is disallowed and added to the call’s cost basis.
Is a call substantially identical to a put on the same stock?
No. A call and a put are economically opposite bets, so they are generally not substantially identical. A deep in-the-money call, however, can be substantially identical to the underlying stock.
Do Section 1256 index options trigger wash sales?
No, not in the usual way. Broad-based index options like SPX and NDX are marked to market under Section 1256, so the standard wash sale deferral generally does not apply to them.
What happens to a disallowed option loss?
It is added to your replacement position’s cost basis. You recover the loss later when you sell that replacement in a clean trade. The original holding period also carries over to the new position.
Can changing the strike price avoid a wash sale?
Sometimes, but not reliably. A small strike or expiration change on a near-the-money option can still be substantially identical. The further the new option moves from the old one economically, the safer it is.
How long must I wait to avoid a wash sale?
At least 31 days. You must avoid buying a substantially identical security for the 30 days before and 30 days after the loss sale, so waiting 31 days after clears the window.
Does the wash sale rule apply inside an IRA?
Yes, and it is worse. Under Revenue Ruling 2008-5, a repurchase in your IRA triggers the rule, but the disallowed loss is permanently lost because it cannot be added to IRA basis.
How do I report a wash sale on my tax return?
On Form 8949 with code “W.” You enter the disallowed loss as a positive adjustment in column (g), then carry the total to Schedule D and your Form 1040.
Does my spouse’s trade count for my wash sale?
Yes. A purchase of a substantially identical security by your spouse, or by a corporation you control, can trigger the wash sale rule on your loss under the related-party provisions.
Do all states follow the federal wash sale rule?
Most do. States that tax income usually start from your federal capital gain, so the disallowed loss carries through. No-income-tax states do not tax the gain, so the rule has no state effect.
This article reflects federal IRS rules and general state conformity as of June 2026 and covers tax year 2025. Tax law changes — confirm current figures before you file.
Related reading
- Can a Wash Sale Happen If You Rebuy Before Selling? (w/Examples) + FAQs
- Does a Wash Sale Make You Lose the Loss Forever? (w/Examples) + FAQs
- Does Selling Part of a Position Trigger a Wash Sale? (w/Examples) + FAQs
- Does the Wash Sale Loss Come Back When You Sell Again? (w/Examples) + FAQs
- Does the Wash Sale Rule Apply to Gains? (w/Examples) + FAQs
- What’s the Penalty for a Wash Sale? (w/Examples) + FAQs