Wash-Sale Rules | Avoid this tax pitfall | Fidelity (2024)

FAQs

Wash-Sale Rules | Avoid this tax pitfall | Fidelity? ›

The wash-sale rule keeps investors from selling at a loss, buying the same (or "substantially identical") investment back within a 61-day window, and claiming the tax benefit.

The wash sale rule states that if you buy or acquire a substantially identical stock within 30 days before or after you sold the declining stock at a loss, you generally cannot deduct the loss.

To avoid a wash sale, the investor can wait more than 30 days from the sale to purchase an identical or substantially-identical investment or invest in exchange-traded or mutual funds with similar investments to the one sold.

The IRS will disallow your loss, and you won't be able to claim a write-off on your tax return. You'll end up owing taxes on any income that you tried to offset with your wash sale. If you're not current on your taxes, you can incur typical penalties for non-payment, including fines.

To avoid this unpleasant situation, close the open position that has a large wash sale loss attached to it and do not trade this stock again for 31 days. Avoid trading the same security in your taxable and non-taxable IRA accounts.

Two Ways to Beat the Rule

One way to defeat the wash sale rule is with a “double up” strategy. You buy the same number of shares in the stock you want to sell for a loss. Then you wait 31 days to sell the original batch of shares.

If the customer sells 200 shares at a loss but has bought the same security within 30 days before or 30 days after the sell, then the sale is a wash sale. If the buy was for 100 shares, only the loss on 100 of the 200 share sale is disallowed and applied to the replacement shares.

The wash-sale rule states that, if an investment is sold at a loss and then repurchased within 30 days, the initial loss cannot be claimed for tax purposes. So, just wait for 30 days after the sale date before repurchasing the same or similar investment.

Q: Do the wash-sale rules apply when you sell stock at a profit? In other words, can one sell and then buy the same stock back again soon thereafter, or does one have to wait a certain period of time? G.C., Medford, Ore. A: You don't have to worry about the wash-sale rules when you sell stock at a profit.

If you have a loss from a wash sale, you can't deduct the loss on your return. However, a gain on a wash sale is taxable.

Does a wash sale really matter? ›

Q: How does the wash sale rule work? If you want to sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Generally, the wash sale rule applies to traders the same way it applies to investors. The difference is that traders have a much harder time keeping records relating to wash sales because they engage in so many transactions. There is a way for traders to escape the wash sale rule altogether.

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.

Your loss is a "wash" in this scenario, just as though you had held your original shares without selling. The tax benefit of your capital loss isn't gone forever, but it's deferred.

When your broker determines that a wash sale occurred in your account, they are required to: Calculate the loss amount of the trade and carry it forward into the cost basis of the replacement securities that you bought.

A wash sale is a transaction in which an investor sells or trades a security at a loss and purchases "a substantially similar one" 30 days before or 30 days after the sale. 1 This is a rule enacted by the Internal Revenue Service (IRS) to prevent investors from using capital losses to their advantage at tax time.

Wash Sale Rule

This regulation identifies wash sales as selling a stock for a capital loss and then repurchasing the stock or a “substantially identical” security within 30 days. If this occurs, then the capital loss is negated and instead applied to the cost-basis of the newly purchased stock price.

After incurring a loss on long or short shares, any option positions resulting in shares from an assignment or (auto) exercise within 30 days can incur a wash sale. Since an option assignment or exercise results in shares, it reestablishes a share position, including in-the-money spreads that offset each other.

General Rule

If you have multiple losses from sales of the same stock, you look at the earliest sale first. Match those shares with the earliest shares you bought in the wash sale period until you've matched all the shares — or until there aren't any more purchases to match with the sale.