The wash sale rule affects your taxes when you sell a stock or option at a loss and then buy the same—or a substantially identical—security within 30 days before or after the sale. The IRS disallows the loss and instead adds it to the cost basis of your new position. That means you won’t be able to claim the loss on your taxes just yet.
This rule was created to prevent investors from creating tax losses without truly exiting a position. For long-term investors, it may only pop up once in a while. But for active traders, especially those who frequently roll or re-enter positions, it can cause headaches come tax time.
A covered call is when you own 100 shares of a stock and sell a call option against it to earn income. It’s a popular strategy for traders looking to generate consistent returns—even in sideways markets.
But let’s say the stock drops below your purchase price and gets called away (i.e., you’re forced to sell it at the strike price). You might have locked in a loss on the shares. If you then sell another covered call on the same stock within 30 days, you may be triggering a wash sale without even realizing it.
These situations are especially common in strategies like the one taught in Print Money Power Play, where rolling and adjusting trades is part of the core method. Without planning around the wash sale rule, that systematic approach can turn into a tax tangle.
Let’s break it down with numbers. Imagine you:
Bought 100 shares of XYZ stock at $100
Sold a covered call with a $95 strike price
The stock is called away at $95, creating a $5 per share loss
Now, you want back in—so you sell a cash-secured put on XYZ within the same week. That new position could be deemed “substantially identical” by the IRS, and now your $500 loss can’t be claimed this year. Instead, it gets added to the cost basis of your next position.
This delay doesn’t mean you lose the deduction—it just kicks it down the road, complicating your accounting and affecting your perceived performance.
One of the trickiest parts of navigating the wash sale rule is figuring out what counts as “substantially identical.” The IRS doesn’t give an exhaustive list, but IRS Publication 550 defines it broadly: securities are substantially identical if they are “so similar that an investor would consider them to be essentially the same investment.”
For options traders, that could mean:
Trading the same stock with different strategies (e.g., covered calls and cash-secured puts)
Rolling from weekly to monthly options with the same strike price
Using different classes of shares from the same company
Trading ETFs or mutual funds that track the same index
So, if you sell a covered call for a loss and then open a collar on the same underlying stock within 30 days, the IRS could still count it as a wash sale—even if it’s not the exact same structure.
That’s why many experienced traders, including those in our Trading Club, make timing and security selection part of their tax strategy—not just their trading plan.
Yes—and this is where things get nuanced. A cash-secured put gives you the right to buy a stock at a set price, while a collar is a protective strategy combining a long stock position with a short call and a long put.
Even though these strategies differ from covered calls, they can create similar market exposure. If used on the same underlying security and within the wash sale window, they may still count as substantially identical under IRS rules.
So switching strategies without switching stocks won’t necessarily save you from a wash sale.
Wash sales don’t mean you’re doing anything illegal. But they delay your ability to write off losses, which can:
Complicate your tax filings
Obscure your actual profitability
Lead to reporting discrepancies if you’re not tracking adjusted cost bases correctly
Active traders often generate dozens—or hundreds—of trades each year. Without awareness of the wash sale rule, your broker’s 1099-B form may not match your actual gains and losses.
Here are a few practical steps to stay clear of trouble:
Wait at least 31 days before re-entering a similar position on the same security.
If you’re trading frequently, consider switching to a different stock or ETF after a loss.
Track your trades using tax software or spreadsheets to flag potential wash sales before they become a problem.
Use a broker that clearly marks wash sales on statements—or better yet, book a mentor session to get one-on-one support.
Some traders also establish a “wash list”—a list of replacement stocks or ETFs with similar sector exposure they can use while waiting out the 30-day window
The wash sale rule is like a speed bump in your trading plan. If you’re trading options like covered calls, cash-secured puts, or collars, you need to be aware of the timing of your re-entries to avoid tax deferrals.
You’re not in trouble if you trigger a wash sale—but your tax reporting gets more complex, and your short-term losses may not help you this year. Strategic traders understand how this rule works and use it to their advantage.
If you’re looking to level up your tax awareness, build smarter trade plans, or just talk it out with others who’ve been there, join our Trading Club. We’re here to help you trade smarter—on the charts and with the IRS.
1. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Ut elit tellus, luctus nec ullamcorper mattis, pulvinar dapibus leo.