The wash sale rules prevent taxpayers from realizing a loss from the sale of a security and then in a short period of time reacquiring that security. This rule only applies to sales resulting in a loss. A wash sale is defined as a sale that results in a loss and substantially the same security is purchased within 30 days before or after the date of the sale. When a loss is limited by the wash sale rule, the basis of the acquired shares is adjusted (increased) by the loss that wasn’t allowed. The wash sale rule also applies to mutual funds. For example, if a mutual fund is sold at a loss and within the test period dividends from the fund were reinvested to buy more shares of the same fund, some or all of the loss may not be allowed.
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