Wash Sale Rule for Business Owners: How IRC 1091 Affects Your Investment Losses

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

The wash sale rule under IRC 1091 prevents taxpayers from claiming a loss on the sale of securities if they purchase “substantially identical” securities within a 61-day window (30 days before through 30 days after the sale). The rule exists to prevent investors from selling a position to harvest a tax loss and immediately buying it back (maintaining the same economic position while taking a tax deduction). When a wash sale occurs, the loss isn’t permanently lost; it’s added to the cost basis of the replacement shares, deferring the loss to a future sale. The rule applies to all taxable accounts (personal and business), across all accounts the taxpayer controls (including IRAs and spouse’s accounts), and covers stocks, bonds, options, mutual funds, and ETFs. Notably, the wash sale rule doesn’t currently apply to cryptocurrency, although legislation to extend it to crypto has been proposed.

✓Key takeaway

Wash sale rule basics:

Factor	Details
IRC section	1091
Window	30 days before sale through 30 days after sale (61-day total window)
What triggers it	Purchasing “substantially identical” securities within the window
Effect	Loss is disallowed; added to the basis of replacement shares
Holding period	Original holding period tacks to replacement shares
Applies to	Stocks, bonds, options, mutual funds, ETFs
Does NOT apply to	Cryptocurrency (as of 2025), real estate, business assets

What counts as “substantially identical”:

Same Security	Substantially Identical?
Same stock (sell AAPL, buy AAPL)	Yes (wash sale)
Same mutual fund (sell Vanguard 500, buy Vanguard 500)	Yes (wash sale)
S&P 500 index fund from different providers	Likely yes (IRS hasn’t ruled definitively, but same index = risk)
Different sectors (sell tech fund, buy healthcare fund)	No (not substantially identical)
Stock vs. option on same stock	Yes (selling stock at a loss and buying a call option = wash sale)
Convertible bond of same company	Possibly (if readily convertible)
Preferred vs. common stock of same company	Generally no (different securities)

Cross-account wash sale traps:

Scenario	Wash Sale?
Sell in taxable account, buy in IRA within 30 days	Yes (and the loss is permanently lost, because the IRA basis adjustment has no tax effect)
Sell in personal account, buy in spouse’s account	Yes (constructive ownership rules)
Sell in individual account, buy in S-Corp account	Potentially (taxpayer controls both)
Automatic dividend reinvestment within 30 days of selling	Yes (the reinvested dividend purchases identical shares)

How does the wash sale rule work in practice?

Hypothetical example

Round numbers. A business owner with a personal brokerage account. Also has an S-Corp with retained cash invested in equities.

Scenario 1: Basic wash sale The owner bought 100 shares of a tech stock at $100/share ($10,000 basis). The stock drops to $70/share. The owner wants to harvest the $3,000 loss.

Action	Date	Result
Sell 100 shares at $70	December 1	$3,000 loss realized
Buy 100 shares of same stock at $68	December 15	Wash sale triggered (within 30 days)

Tax result:

Item	Amount
Loss on sale	($3,000)
Wash sale disallowance	$3,000 (loss disallowed)
Deductible loss	$0
Basis of new shares	$68 + ($30 disallowed loss / share) = $98/share ($9,800 total)
Holding period	Tacks from original purchase date

The $3,000 loss is not deducted in the current year. Instead, it increases the basis of the replacement shares from $6,800 to $9,800. If the owner later sells the replacement shares at $90/share:

Without wash sale rule	With wash sale rule
Gain: $90 - $68 = $22/share = $2,200	Gain: $90 - $98 = ($8)/share = ($800) loss

The loss is deferred, not eliminated. The owner eventually recognizes the loss through the higher basis.

Scenario 2: The IRA trap (permanent loss) The owner sells the tech stock at a $3,000 loss in the taxable account and buys the same stock in their IRA within 30 days.

Item	Result
Loss in taxable account	$3,000 disallowed (wash sale)
Basis adjustment in IRA	IRA doesn’t track basis for tax purposes
Net result	$3,000 loss permanently lost

This is the worst outcome. The wash sale rule adds the disallowed loss to the replacement shares’ basis, but IRA shares don’t benefit from basis adjustments (IRA distributions are taxed as ordinary income regardless of basis). The loss simply disappears.

Scenario 3: Proper tax-loss harvesting (avoiding the wash sale)

Strategy A: Wait 31 days

Action	Date	Result
Sell 100 shares at $70	December 1	$3,000 loss realized
Wait (don’t buy)	December 2-31	No purchases of identical securities
Buy 100 shares at market price	January 2	Not a wash sale (31+ days later)
Deductible loss		$3,000

Risk: the stock could rise during the 31-day gap, and the owner misses the rebound.

Strategy B: Buy a similar (not identical) security

Action	Date	Result
Sell 100 shares of AAPL at a loss	December 1	$3,000 loss realized
Buy 100 shares of MSFT (different stock, same sector)	December 1	Not a wash sale (not substantially identical)
Deductible loss		$3,000

The owner maintains exposure to the tech sector but holds a different stock. After 31 days, the owner can sell MSFT and buy AAPL back if desired.

Strategy C: Double-up method

Action	Date	Result
Buy 100 additional shares of AAPL at $70	November 1	Now owns 200 shares
Wait 31 days	November 1-December 1
Sell original 100 shares at a loss	December 2	$3,000 loss realized
Deductible loss		$3,000 (the new shares were purchased more than 30 days before the sale)

This requires twice the capital but maintains continuous exposure and captures the loss.

The year-end planning angle: Business owners who want to harvest losses before December 31 must sell by December 1 (to allow the 31-day window to pass by year-end without triggering a wash sale from January purchases). Or they must avoid repurchasing identical securities until January 2.

Cryptocurrency exception (as of 2025):

Security	Wash Sale Applies?
Stocks, ETFs, mutual funds	Yes
Options on stocks	Yes
Bonds	Yes
Bitcoin, Ethereum, other crypto	No (property, not a “security” under IRC 1091)

A business owner can sell Bitcoin at a loss and immediately repurchase the same Bitcoin without triggering a wash sale. This makes crypto tax-loss harvesting significantly more flexible than stock tax-loss harvesting. Proposed legislation could change this, but as of 2025, the exception stands.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "Wash Sale Rule for Business Owners: How IRC 1091 Affects Your Investment Losses." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-wash-sale-rule-investment-losses

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.