In today’s volatile markets, you may be tempted to buy and sell some securities. If you do, you’ll want to keep in mind the so-called “wash-sale” rule.
According to the Security and Exchange Commission (SEC), 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.”
Why would an investor do this?
Mainly to take a capital loss while retaining the security.
The Internal Revenue Service (IRS) frowns on this, but many investors try to find ways around the rule, especially in today’s market environment. Many others just may not understand how wash-sale rules work.
For example: You buy a stock and hold it. A few years later, you purchase additional shares of the same stock. A few days later, you sell the initial shares at a loss. You then deduct the loss.
This seems to meet the wash-sale rule requirements – but it doesn’t.
Many investors mistakenly assume the rule applies only when you buy back a security 30 days after the sale, but as the SEC definition explains it applies before a sale as well.
Some areas of the law are fuzzy. For example, the definition of “substantially identical” is unclear.
So be sure to consult your advisor before buying and selling any stocks, bonds or mutual funds.