It's not uncommon for investors who ain stocks or securities that take lost value to sell them in order to take reward of the losses for tax reasons. It's not a bad idea, peculiarly if it'due south a stock you lot want to sell anyway; you tin apply the loss to first capital gains or even, to some extent, start your taxable income from other sources, such as regular earnings.

But what if it's a stock you still like, and you don't actually want to sell? Tin can't you lot only sell information technology, harvest the loss, and so purchase information technology back immediately? In a discussion, no. This is precisely what the wash-sale rule exists to prevent: harvesting revenue enhancement-loss benefits on an investment you don't intend to get out.

What is a wash sale?

Under the wash-sale rules, a wash sale happens when you sell a stock or security for a loss and either buy information technology back within xxx days after the loss-sale date or "pre-rebuy" shares inside 30 days earlierselling your longer-held shares.

In either case, the loss is not considered realized for tax purposes, with the auction and subsequent (or prior) purchase "washing" 1 some other out. This rule is designed to prevent people from selling stock to just to merits the tax benefit, without intending to exit the investment.

Over again, the dominion applies to a 30-day period before and afterward the sale date to forbid your buying the stock "back" before information technology's even sold.

Launder-auction rule examples

Permit's say you lot ain 100 shares of XYZ Corp with a cost basis (what you paid for them) of $ten,000, and you sell them on June 1 for $3,000. That works out to a $7,000 loss, and if you own the shares in a taxable brokerage account, you can claim that loss when you lot file your taxes.

All the same, if you were to rebuy shares someday betwixt June ii and July 1, and so the sale is considered a wash sale, and the loss doesn't qualify as a taxable loss. It works the same mode if you buy shares within 30 days earlier your sale also; in this case, if you lot bought shares equal to what you sold on June one anytime on or subsequently May 2, then it would "launder out" your taxable loss.

What happens if you buy fewer shares?

A key point almost wash sales is that they work out at 1:1 for each share you repurchase. Using the instance higher up, if you lot repurchased l shares in that 30-before-to-30-afterward menstruation, it would wash out 50 shares of the taxable loss.

Wash-sale rules

Here is how the Internal Revenue Service defines a wash auction, straight from IRS Publication 550:

A wash sale occurs when you sell or merchandise stock or securities at a loss and within xxx days before or after the sale y'all:

  1. Buy essentially identical stock or securities,

  2. Acquire substantially identical stock or securities in a fully taxable trade,

  3. Acquire a contract or option to buy substantially identical stock or securities, or

  4. Learn substantially identical stock for your private retirement arrangement (IRA) or Roth IRA.

Let's summarize: A wash sale isn't solely well-nigh purchasing stocks; it can besides involve acquiring options to buy stock. Moreover, the dominion too counts if you purchase identical shares in a different account, including a traditional or Roth IRA. In other words, you lot can't harvest a tax loss in your taxable account if you buy shares within the window that creates a wash sale, fifty-fifty in a different account (including retirement accounts).

One final note: Wash-auction provisions work on shares that you sell for a loss, but there are no corresponding wash-auction rules for stock that you sell at a proceeds. That is, if you sell stock for a gain and purchase information technology right back, yous must however written report the entire gain.

How do you avoid a launder auction?

The commencement, most obvious thing to do is to avoid buying shares in the aforementioned stock within 30 days beforeor 30 daysafterselling. If you practise, y'all lose the ability to harvest a tax loss on the number of shares you lot buy.

All the same, if you lot inadvertently create a wash sale by rebuying besides presently, your potential taxable loss doesn't only go up in smoke: The "lost" revenue enhancement basis carries over to the replacement purchase. But sell again, andfollow the launder-sale rules this time. You'll finally be able to harvest that taxation loss.