Selling Stock and Wash Sale Rules for Investments

What are Wash Sales Rules?

When selling stock or other types of investments, it is very important for a taxpayer to be aware of the “wash sale” rules. These wash sale rules could potentially disallow a loss that a taxpayer thought they were able to take.

Under these wash sale rules if you sell stock for a loss and then turn around and buy substantially identical stock back within the 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. The security is then repurchased in the hope that it will recover its previous value, which would only become taxable in some future tax year.

Selling Stock and Wash Sale Rules for Investments

This rule prevents taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Remember, that the was sale rule will apply to exchange traded funds (ETFs) and certain mutual funds. Although the loss cannot be claimed on a wash sale, the disallowed amount is added to the cost basis of the new stock. Thus, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).

 

There are times, though, when the wash sale rule can have undesirable consequences.

  • If you don’t sell the replacement stock in the same year, your basis adjustment benefits will be postponed, possibly to a year when the deduction is of far less value.
  • If you die before selling the replacement stock, neither you nor your heirs will benefit from the basis adjustment.
  • You can also lose the benefit of the deduction permanently if you sell stock and arrange to have a related person — or your IRA — buy replacement stock.

Note that while wash sale losses cannot be claimed, gains cannot be avoided. That is, if you sell stock for a gain and buy it right back, you must still report the gain-no special rule applies. A wash sale can take place at any time during the year.

 

Example of Wash Sale for Stocks

On 9/30/XX, you buy 500 shares of ABC at $10 per share. One year later the stock price starts to drop, and you sell all your shares at $9 per share on 10/4/XY. Two days later, on 10/6, ABC bottoms out at $8 and you buy 500 shares again. This series of trades triggers a wash sale.

The holding period of the original shares will be added to the holding period of the replacement shares, effectively leaving you with a long-term position. Additionally, the cost basis on your 10/6 purchase will be adjusted to $4,500, reflecting the cost of acquisition ($4,000) plus the $500 disallowed loss from your 10/4 sale.