Can I Sell a Stock and Buy It Back the Next Day?

Investors often consider selling a stock and repurchasing it shortly after, perhaps even the next day. While such immediate transactions are technically feasible, they carry important implications. Various regulations and market mechanics influence how these quick trades are treated, affecting both trading operations and tax obligations.

The Wash Sale Rule

The Internal Revenue Service (IRS) implements the wash sale rule, detailed in Internal Revenue Code Section 1091, to prevent taxpayers from artificially generating investment losses for tax purposes. This rule disallows a loss deduction if you sell stock or securities at a loss and then acquire substantially identical stock or securities within a 61-day period. This period includes 30 days before the sale, the sale date, and 30 days after the sale.

“Substantially identical” does not always mean the exact same security. It includes repurchasing identical stock, but can also encompass convertible bonds, options, or mutual funds considered equivalent to the sold security. The IRS does not provide a definitive list, leaving some interpretation to the taxpayer. However, common examples not considered substantially identical include bonds from the same issuer with different maturities or interest rates, or common and preferred stock of the same company.

When a wash sale occurs, the loss is disallowed for tax purposes in the current year. This loss is not permanently lost; instead, it is added to the cost basis of the newly acquired, substantially identical security. This adjustment defers the loss, which can then reduce any capital gain or increase a capital loss when the replacement security is eventually sold. The holding period of the original security is also added to that of the replacement security.

The wash sale rule applies across all your accounts, including those held at different brokerage firms and even Individual Retirement Accounts (IRAs). It also extends to transactions made by related parties, such as a spouse, if they acquire substantially identical securities within the prohibited period. While brokerage firms typically track wash sales within the same account and report them on Form 1099-B, taxpayers are responsible for identifying and reporting all wash sales across all their accounts and related parties.

Practical Aspects of Short-Term Stock Trading

Frequent short-term stock trading involves practical considerations beyond tax implications. The standard settlement cycle for most U.S. equities is T+1, meaning trades settle one business day after the transaction date. While trades execute instantly, the actual transfer of ownership and funds occurs on the settlement date. This impacts when funds from a sale become available for withdrawal or reinvestment.

The Financial Industry Regulatory Authority (FINRA) Pattern Day Trader (PDT) rule applies to active traders. This rule classifies you as a pattern day trader if you execute four or more “day trades” within any five consecutive business days in a margin account. A day trade involves buying and selling the same security within a single trading day. Pattern day traders must maintain a minimum equity balance of at least $25,000 in their margin account on any day they engage in day trading.

Falling below the $25,000 equity minimum can lead to restrictions, such as being prohibited from further day trading until the account is restored. If a margin call is issued, traders typically have up to five business days to meet it. Failure to meet this call can result in the account being restricted to cash-available trading for 90 days.

Frequent trading accumulates brokerage commissions and fees, which can erode profits. While many brokers offer commission-free stock trades, other fees may still apply. Rapid trading also exposes investors to market liquidity risks and price fluctuations. Even slight price movements between a sale and immediate repurchase can impact profitability.

Tax Reporting for Wash Sales

Taxpayers are responsible for accurately reporting wash sales to the IRS. Brokerage firms are required to report sales of securities on Form 1099-B, “Proceeds From Broker and Barter Exchange Transactions.” This form often indicates if a wash sale has occurred within the same account. However, brokerage firms may not identify all wash sales, especially if transactions occur across different accounts or if a related party is involved.

Taxpayers must identify and correctly report all wash sales on their tax return. This involves using IRS Form 8949, “Sales and Other Dispositions of Capital Assets,” and Schedule D, “Capital Gains and Losses.” On Form 8949, wash sale transactions require an adjustment to the cost basis of acquired shares.

When reporting a wash sale on Form 8949, enter “W” in column (f) to indicate a wash sale adjustment. The disallowed loss amount is then added as a positive number in column (g), which increases the cost basis of the repurchased shares and reduces the reported gain or increases the reported loss on the form. The totals from Form 8949 are then carried over to Schedule D, where the overall capital gains and losses for the year are summarized. Correctly reporting these adjustments ensures that the deferred loss is accounted for when the replacement securities are eventually sold.