It'southward not uncommon for investors who own stocks or securities that have lost value to sell them in order to take advantage of the losses for tax reasons. It's non a bad idea, especially if it's a stock you want to sell anyway; yous tin can utilize the loss to offset majuscule gains or even, to some extent, offset your taxable income from other sources, such every bit regular earnings.

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But what if it's a stock you still like, and yous don't really want to sell? Can't you just sell it, harvest the loss, and then buy it back immediately? In a word, no. This is precisely what the wash-auction rule exists to foreclose: harvesting taxation-loss benefits on an investment yous don't intend to get out.

What is a wash sale?

Nether the wash-sale rules, a wash auction happens when you lot sell a stock or security for a loss and either buy information technology dorsum within thirty days later on the loss-auction appointment or "pre-rebuy" shares within thirty days earlierselling your longer-held shares.

In either example, the loss is non considered realized for tax purposes, with the auction and subsequent (or prior) purchase "washing" one another out. This rule is designed to forestall people from selling stock to simply to claim the revenue enhancement benefit, without intending to go out the investment.

Again, the rule applies to a 30-twenty-four hours menstruum earlier and after the sale date to prevent your ownership the stock "back" earlier it's even sold.

Wash-sale rule examples

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

All the same, if y'all were to rebuy shares someday betwixt June 2 and July ane, then the sale is considered a wash sale, and the loss doesn't qualify equally a taxable loss. It works the same mode if y'all buy shares within thirty days before your auction also; in this case, if yous bought shares equal to what you sold on June 1 anytime on or after May 2, then it would "launder out" your taxable loss.

What happens if you lot buy fewer shares?

A key bespeak near launder sales is that they work out at 1:one for each share you repurchase. Using the example above, if y'all repurchased 50 shares in that thirty-before-to-30-subsequently period, it would wash out fifty shares of the taxable loss.

Wash-sale rules

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

A launder sale occurs when you sell or trade stock or securities at a loss and inside xxx days before or after the auction yous:

  1. Buy substantially identical stock or securities,

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

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

  4. Larn substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

Let's summarize: A wash sale isn't solely most purchasing stocks; information technology can besides involve acquiring options to buy stock. Moreover, the rule also counts if you purchase identical shares in a different account, including a traditional or Roth IRA. In other words, yous can't harvest a tax loss in your taxable account if you lot purchase shares inside the window that creates a wash sale, fifty-fifty in a different business relationship (including retirement accounts).

One last note: Wash-sale provisions work on shares that you sell for a loss, only there are no corresponding wash-auction rules for stock that you sell at a proceeds. That is, if y'all sell stock for a gain and buy it right dorsum, you must still report the unabridged gain.

How do you avert a launder sale?

The offset, well-nigh obvious thing to do is to avert buying shares in the same stock within thirty days beforeor 30 daysafterselling. If you practise, yous lose the power to harvest a tax loss on the number of shares y'all buy.

Yet, if you inadvertently create a wash auction by rebuying too soon, your potential taxable loss doesn't simply become up in fume: The "lost" tax footing carries over to the replacement purchase. Merely sell again, andfollow the wash-sale rules this time. You'll finally be able to harvest that tax loss.