Wash Sales

Wash Sales: Understanding the Tax Implications

A wash sale occurs when an investor sells a security at a loss and then buys a substantially identical security within 30 days before or after the sale. The IRS disallows the loss deduction in such cases to prevent taxpayers from artificially creating tax losses without changing their investment position.

Key Rules for Wash Sales

• 30-Day Rule: If you buy a substantially identical security within 30 days before or after selling at a loss, the loss is disallowed.
• Loss Deferral: The disallowed loss is added to the cost basis of the new security, which may affect future capital gains or losses.
• Substantially Identical Securities: This includes the same stock, mutual fund, or ETF. The IRS considers securities "substantially identical" if they are the same or very similar in nature and risk.

Why Wash Sales Matter

Wash sales are designed to prevent tax avoidance. If you sell a stock at a loss to claim a tax deduction and then immediately repurchase it, you are essentially maintaining your original position while trying to reduce your tax liability. The IRS treats this as a wash sale and disallows the deduction.

How to Handle Wash Sales

• Track Your Transactions: Keep detailed records of all buy and sell transactions, including dates and securities involved.
• Use IRS Publications: Refer to IRS Publication 550, "Investment Income and Expenses," for guidance on capital gains and losses, including wash sales.
• Adjust Cost Basis: The disallowed loss is added to the cost basis of the new security, which will reduce your gain (or increase your loss) when you eventually sell it.

Relevant IRS Resources

For more detailed information on wash sales and capital gains/losses, consult the following IRS publications:

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Disclaimer: Always verify information with official Federal or State Department of Revenue Forms and Instructions.