Wash Sale Rule When Short Selling Stocks

The IRS wash sale rule is a bit different when it comes to short selling stocks (sell stock short or short sales).

IRS publication 550 page 56 states:

Short sales. The wash sales rules apply to a loss realized on a short sale if you sell, or enter into another short sale of, substantially identical stock or securities within a period beginning 30 days before the date the short sale is complete and ending 30 days after that date.

Therefore, if you cover, or buy back, your short sale shares at a loss and then sell short the same stock again within the 30 day period, you have a wash sale, and the loss becomes part of your future cost basis when you finally cover the short. This is a bit different in the sense that a sale has triggered the wash sale rather than a purchase.

Because TradeLog accurately matches short sale positions as well as long positions, it is able to properly handle this particular part of the wash sale rule.

To see all of the possible combinations of trades that can trigger the IRS wash rule, please see our Wash Sale Trade Combinations tax topic.

You must adjust wash sales between stocks and options, learn more about why.