Key Points

  • The wash-sale rule was designed to discourage people from selling securities at a loss simply to merits a tax do good.

  • A wash sale occurs when y'all sell a security at a loss and then purchase that same security or "substantially identical" securities inside 30 days (before or after the sale date).

  • If you end up beingness affected by the launder-sale dominion, your loss volition be disallowed and added to the cost footing of the securities you repurchased.

The wash-sale rule was designed to preclude investors from selling a security at a loss and so they can claim tax benefits, merely to turn around and immediately buy the aforementioned security again. Even investors who have no intention of breaking this rule can get tripped up by it if they use an automatic investment strategy, such as reinvesting dividends, potentially costing themselves some tax benefits in the process.

Here we'll take a closer wait at the wash-auction rule and answer some mutual questions about information technology.

Q: I want to sell a stock to take a tax loss, only I plan to buy it again because I want it in my portfolio. What are the taxation implications?

If you want to sell a security at a loss and buy the same or a essentially identical security within 30 calendar days before or subsequently the sale, the wash-sale dominion volition kicking in.

In such cases you won't be able to take a loss for that security on your current-twelvemonth revenue enhancement return. Instead, you volition have to add the loss to the cost basis of the replacement security. In addition, the holding period of the original security gets tacked onto to the holding period of the replacement security.

Hither's an case of how this might work:

Let'southward say you buy 100 shares of XYZ stock for $10 per share ($1,000 of stock). Ane year later, the stock starts dropping, so you sell your 100 shares for $8 per share—a $200 loss. Three weeks later, XYZ is trading at $6 per share and y'all decide that price is too good to pass up, and then yous repurchase the 100 shares for $600. This triggers a wash sale.

As a result, the $200 loss is disallowed every bit a deduction on your electric current-year tax return and added to the cost basis of the repurchased stock. That bumps the price basis of your $600 of replacement stock upwards to $800, so if you lot later sell that stock for $1,000, your taxable gains volition be $200 instead of $400. And because you lot previously held XYZ for a twelvemonth, it will automatically be treated as a long-term capital gain, even if you sell it after simply a few months.

A few other things to note: A higher cost basis decreases the size of any time to come gains realized from the auction of the replacement security, thereby lowering your future tax obligation. If you sell the investment at a loss, the higher price ground would actually increase the size of the loss for which you lot could merits a deduction.

And ane of the potential upsides of an extended property period is that it would lower your revenue enhancement obligation if you sold the replacement security later on less than a year. (Normally, short-term capital gains from investments held for less than a year are taxed at the higher regular income tax rate, while longer-term majuscule gains are taxed at the lower capital gains charge per unit).

Q: What was Congress trying to accomplish with the launder-auction rule?

Basically, the goal is to prevent people from selling securities for no other reason than to generate losses that could exist used to reduce their taxable income. Before the constabulary was in place, investors could sell a losing stock and so purchase information technology again a minute later, effectively locking in a loss to reduce their taxes.

Q: What if I wanted to sell a security to take a loss, but didn't want to be out of the market for an entire month just to avoid the wash sales rule? What could I exercise?

Y'all could sell the security at a loss and the use the proceeds from that auction to purchase a similar —merely not essentially identical—security that suits your nugget allocation and long-term investment program.

Unfortunately, the government has non provided a straightforward definition of what it considers "substantially identical." Investors will have to use their best judgment to avert the wash-sale rules.

Hither'due south an example of how the procedure would work. Permit'due south say you own an exchange-traded fund (ETF) that is closely correlated to the S&P 500® Index and you lot end up selling that ETF at a loss. Yous could then use the proceeds from that auction to purchase a different ETF (or multiple ETFs) with like merely not identical assets, such as an ETF that tracks the Russell 1000® Index. By doing this you lot are able to take a loss on your current year tax return and even so remain in the marketplace with nearly the aforementioned asset allocation in your portfolio.

The process of taking losses and finding other investments that meet your needs isn't e'er like shooting fish in a barrel. To successfully harvest a taxation loss, you have to monitor your nugget allocations, scout out for wash sales, and make sure that the replacement avails you buy aren't substantially identical.

Q: If I purchased and sold shares of a stock at a loss in i of my Schwab accounts and and so repurchased them in another Schwab business relationship, would I nevertheless trigger the wash-sale rule?

Yeah, wash-auction rules employ beyond all of your accounts, including those outside Schwab. In addition, wash-sale rules also apply to transactions in your spouse's accounts. IRS regulations crave just that Schwab track and written report wash sales on the same CUSIP number (a unique 9-character identifier for a security) within the same business relationship. Ultimately, each individual is responsible for tracking sales in their accounts (and their spouse's accounts) to ensure they don't have a wash auction.

Q: Do the wash sale rules use to ETFs, common funds and options?

Yeah, if the security has a CUSIP number, and so it's subject to launder-auction rules. In improver, selling a stock at a loss and so buying an option on that same stock will trigger the launder-sale rule.

ETFs and common funds present investors a unlike set of challenges. Switching from one ETF to an identical ETF offered by another company could trigger a launder-sale. There are ways effectually this problem. For example, an investor belongings an ETF indexed to the S&P 500 at a loss might consider switching to an ETF or mutual fund that is indexed to a different gear up of securities, such equally the Russell 1000 or Dow Jones Industrial Average.

Q: What would happen if I sold a security at a loss in a taxable account and so immediately repurchased it in a retirement account, such as an IRA?

The IRS has ruled ( Rev. Rul. 2008-5 ) that when an individual sells a security at a loss and so repurchases that security in their (or their spouses') IRA within thirty days before or subsequently the sale, that loss will be subject to the wash-sale rules.

Q: Could I sell a security at a loss on December. 15, in club to squeeze it into the current tax yr, and then repurchase the security on Jan. four without triggering a launder sale?

No, the wash-sale rules are non confined to the calendar year. In this situation and your loss would exist disallowed if you reacquired the security within 30 days.

What You lot Can Do Adjacent

  • Make sure that you're considering the potential revenue enhancement implications of your investments.

  • Read Publication 550, Investment Income and Expenses for more than data.

  • Talk to a financial professional. Telephone call Schwab at 800-355-2162, visit a co-operative, or find a consultant.