Most investors are familiar with the “wash sale” rule – but that doesn’t stop them from trying to find ways around it, especially in today’s market environment.
A wash sale occurs when you sell a security at a loss, then buy back the same security (or what the Internal Revenue Service calls something “substantially identical”) within 30 days. The idea is to take a capital loss and keep the security – in essence, to have your cake and eat it too. Clearly, the IRS frowns upon this.
Some people trying to find a way around the wash sale rule mistakenly assume it refers only to buying back a security 30 days after the sale – but it applies before a sale as well.
What does that mean? To illustrate, let’s say you buy a stock and hold it for several years. You then purchase additional shares and sell the initial shares at a loss a few days later. You then deduct the loss.
That seems like it would work – but it doesn’t, because the wash sale rule still applies. You can’t sell a security then buy the same security 30 days before or after the sale.
Some areas of the law are fuzzy, as is the case with many IRS regulations. For example, the definition of “substantially identical” is unclear. And the wash sale rule can get confusing when used with derivatives, which are sophisticated securities that derive their value from the value of underlying securities.
As a result, you may want to consult your financial advisor before buying and selling any security