The IRS Wash Sale Rule
You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade, or
- Acquire a contract or option to buy substantially identical stock or securities.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock on securities sold.
Avoiding Wash Sales
If you are not an active trader, you can avoid the wash sale rules by simply staying away from the loss stock for 31 days.
If you are an active trader and due to the fact that you are in and out of trades frequently and some losses are unavoidable, you really don't have to worry too much about the affect of wash sales until the year-end. Even if you end up with a wash sale, you won't permanently lose the loss, it will just move forward and you will have a greater tax consequence in the current year. To avoid having some or all of your losses disallowed for the current tax year, you can follow these strategies:
If you take losses in December don't buy back the same stock for 31 days. If you take losses in any stock in December, be sure NOT to re-purchase the same stock (or an option on that stock) for a period of 31 days.
Close out any open positions at year-end that have accumulated wash sale losses. Close any open position that has a wash sale loss attached to it and do not trade this stock again for 31 days.
