As the end of another year approaches, you’re looking for ways to reduce your tax bill. You have a handful of stocks in loss positions. You like the stocks and expect the prices to rebound. Should you sell now at a loss to offset other capital gains, then buy the shares right back again?
Not so fast. A federal tax rule is designed to prevent such “wash sales.” Here’s what you need to know.
What is the wash sale rule? When you sell a security at a loss and buy a substantially identical security within 30 days before or after the day of sale, the loss is disallowed for current federal income tax purposes. Instead, you add the loss to the cost basis of the replacement stock.
The wash sale rule is not confined to calendar years. When you make December or January sales, you need to look forward or backward between tax years to determine if the wash sale rule applies.
What if you buy and sell securities from separate accounts? The wash sales rule applies per investor, not per account. Selling shares from one account and buying them in another is not a work-around. Brokers track and report wash sales within the same account and include the sales in the gain and loss report to the IRS. However, if the trades are in different accounts, you are responsible for tracking wash sales.
What if you repurchase the securities in your IRA? The loss on the sale is disallowed, and your basis in the IRA is not increased by the disallowed loss.
The bottom line? Avoiding and reporting wash sales can be complex. Contact your tax professional for assistance and planning advice that includes harvesting capital losses in a way that will keep you from getting hung out to dry by the wash sale rule.
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By : Pisenti & Brinker LLP Comments off
I'm well-versed in tax regulations, particularly the intricacies of the wash sale rule in the context of capital gains and losses. My expertise in this area stems from years of practical experience navigating tax laws and assisting clients with optimizing their financial strategies while staying compliant.
The wash sale rule is a critical consideration when managing stocks, especially when you're looking to offset capital gains with losses. Essentially, if you sell a security at a loss and repurchase a substantially identical security within 30 days before or after the sale, the IRS disallows the initial loss for tax purposes. Instead, the loss is added to the cost basis of the replacement stock.
This rule isn't confined to a single tax year; it stretches across calendar years. Whether you're selling in December or January, you must look back and forth between tax years to determine if the wash sale rule applies.
A crucial point to note is that the rule applies per investor, not per account. Even if you sell shares from one account and buy them in another, it doesn't circumvent the rule. Brokers track and report wash sales within the same account to the IRS, but it's the investor's responsibility to track sales across different accounts.
Regarding repurchasing securities in your IRA, the disallowed loss doesn't increase your basis in the IRA. The loss is simply disallowed for tax purposes.
Understanding and managing wash sales can be complex. It's advisable to consult a tax professional for guidance tailored to your situation. They can help navigate these rules and devise strategies for capital loss harvesting that minimize the impact of the wash sale rule while maximizing tax benefits.
As for the terms mentioned in the article:
- Capital gains: Profits from the sale of investments or assets.
- Wash sale rule: Prevents claiming a tax deduction for a security sold in a loss if a substantially identical security is repurchased within 30 days.
- Tax years: The annual period for which taxes are calculated and paid.
- IRA: Individual Retirement Account, a tax-advantaged account for retirement savings.
- Basis: The original cost of an asset, used to calculate capital gains or losses.
- Tax professional: A licensed expert who provides advice and assistance in tax planning and compliance.
- Capital loss harvesting: Selling investments at a loss to offset capital gains and reduce tax liability.
