What is a Wash Sale?
A wash sale is the sale of a stock or security that is closely followed by a repurchase of the same, or significantly similar, stock or security. For instance, if you sold 100 shares of General Electric (NYSE: GE) one day and then turned around and bought 100 Shares of General Electric the next day, it would be considered a wash sale. After all, when you look at it over a longer period of time, what you did doesn’t really count as a sale because you just turned around and bought the stock again. It is as if you never sold the stock in the first place. Why Would a Stock Trader Execute a Wash Sale? A stock trader would execute a wash sale to take advantage of the tax benefits that come from selling a stock at a loss. Imagine you have a stock trade that has lost $1,000. You know that if you sell the stock, you can realize a $1,000 loss on your tax return and lower the amount of money you owe Uncle Sam. So you decide to sell the stock. However, you also believe that the stock is going to g
A wash sale occurs when you sell stock or securities and, within 30 days before or after the sale, you buy acquire in a taxable exchange or acquire a contract or option to buy substantially identical stock. Commodity futures contracts are not stock or securities and are not covered by the wash sale rule, however any position of a straddle acquired after June 23, 1981 is included in these rules. See IRS Publication 550, “Investment Income and Expenses”, available free on line at www.IRS.gov/formspubs and/or consult your tax professional. For purposes of the wash sale rule, a short sale is considered complete on the date the short sale is entered into if on that date: 1. You own (or, on or before the date of the short sale, you entered into a contract or option to acquire) securities identical to those sold short (in any account you may own regardless of where it is located) and 2. You deliver such stock or securities to close the short sale.
A wash sale occurs when, within 30 days of the realization of a loss, an investor acquires securities “substantially identical” to the securities that were sold at a loss. in the event of a wash sale , the loss is not immediately recognized, but is added to the basis of the purchased securities and recognized when those securities are sol, presumably without being tainted with another wash sale. The Internal Revenue Service has steadfastly resisted efforts to get it to define “substantially identical.” You should check with a tax advisor to get an appropriate comfort before making an additional stock purchase within 30 days before or after realizing a loss on a sale of that stock.
The concept of the wash sale involves selling off some type of security at a loss. This action would occur near the end of the current tax year. At the same time, the process will involve purchasing the same or a very similar stock in a very short period of time. Designed as a means of creating a capital loss that can be claimed on the tax return for the covered period, the idea is to offset the overall capital gains for the tax year, while still managing to keep the security in the investment portfolio for future use. Over time, some steps have been taken to control the process of the wash sale. For example, there are now provisions in tax codes in the United States and the United Kingdom that will disallow wash sales if the stock, bond, or option is repurchased within thirty calendar days of the sale. This is true even if the period between the sale and the repurchase occurs at the end and the beginning of two tax years. When the wash sale is disallowed, the amount of loss is added t
