As we head into the year-end, it’s often a good time to look at realizing losses for tax purposes on your investments. If you’re planning to sell capital assets at a loss to offset gains that have been realized during the year, it’s important to beware of the “wash sale” rule.
Under this tax rule, if you sell stock or securities for a loss and buy substantially identical stock shares or securities back within a 30-day period before or after the sale date, the loss can’t be claimed for tax purposes.
The wash sale rule is designed to prevent taxpayers from benefiting from a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold.
Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of (other than in a wash sale).
Assume you buy 500 shares of XYZ Inc. for $10,000 and sell them on Nov. 5 for $3,000. On Nov. 30, you buy 500 new shares of XYZ for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
The wash sale rule can come as a nasty surprise at tax time. If you need help understanding this further and how it relates to your personal situation, please feel free to reach out of us.
Julia Carlson is a registered principal with LPL Financial, and securities and advisory services are offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.
Information in this column is for general information only and not intended as investment, tax or legal advice. Please consult the appropriate professionals for specific information regarding your individual situation prior to making any financial decision.
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