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The wash-sale rule is a tax rule that prevents you from claiming a loss on a sale of a security if you buy a substantially identical security within 30 days before or after the sale.Â
This regulation is intended to prohibit taxpayers from faking losses in order to use them as an offset against gains and lower their tax obligations.
Because you bought substantially identical shares within 30 days of selling them at a loss in this case, the wash-sale rule has been triggered. The $2,000 loss cannot, therefore, be written off on your tax return. To the cost basis of the new shares, you must instead add the disallowed loss. Your new cost basis is $8,500 plus $2,000, which equals $10,500. In the event that you later sell the new shares, this will lower your taxable gain or increase your deductible loss.
The wash-sale rule can be difficult to understand, particularly if you trade regularly and have several accounts. To ensure that you don't break this regulation and lose out on crucial tax deductions, it's critical to maintain track of your transactions and cost basis. In order to identify and account for wash sales, you might also wish to speak with a tax expert or use tax software.
The wash-sale rule is applicable to a variety of securities, including stocks, bonds, mutual funds, ETFs, options, and other types of securities. Commodities, currencies, and virtual currencies are not covered.
How does the wash-sale rule work?
Consider purchasing 100 shares of XYZ stock on January 1st for $10,000. You sold all of your shares on January 15th when the stock price fell to $8,000, incurring a loss of $2,000 in the process. You paid $8,500 on January 20th to repurchase 100 shares of XYZ stock in anticipation that the price would rise.Because you bought substantially identical shares within 30 days of selling them at a loss in this case, the wash-sale rule has been triggered. The $2,000 loss cannot, therefore, be written off on your tax return. To the cost basis of the new shares, you must instead add the disallowed loss. Your new cost basis is $8,500 plus $2,000, which equals $10,500. In the event that you later sell the new shares, this will lower your taxable gain or increase your deductible loss.
How can you avoid the wash-sale rule?
There are a few strategies you can use to circumvent the wash-sale rule and keep your right to deduct losses from the sale of securities. Here are some strategies:- If you sold a security at a loss, you must wait at least 31 days before purchasing the same or nearly identical security again.
- Purchase a different security from the one you sold for a loss that is not nearly identical to it. If you sold your XYZ stock, for instance, you could purchase ABC stock or an ETF that tracks a different sector or index.
- Within 30 days after selling a security at a loss, sell another security that is virtually identical to the one you purchased. For instance, if you purchased XYZ stock within 30 days of selling it at a loss, you can sell another lot of XYZ stock that you had been holding for over a year. You can then write off the initial loss because you'll have created a reverse wash sale.
- A tax-advantaged account, such as an IRA or a 401(k), should be used to sell the security (k). Due to the fact that these accounts are exempt from capital gains taxes, the wash-sale rule does not apply to them.
The wash-sale rule can be difficult to understand, particularly if you trade regularly and have several accounts. To ensure that you don't break this regulation and lose out on crucial tax deductions, it's critical to maintain track of your transactions and cost basis. In order to identify and account for wash sales, you might also wish to speak with a tax expert or use tax software.
