Wash-Sale Rule: What it is and How to Avoid | The Motley Fool (2024)

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Wash-Sale Rule: What it is and How to Avoid | The Motley Fool? ›

Designed to prevent abuse, it disallows tax deductions if you repurchase similar securities within 30 days. To maintain tax benefits, refrain from purchasing identical securities 30 days before or after a sale or adjust by selling again later.

To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index^® (RUI). That would preserve your tax break and keep you in the market with about the same asset allocation.

To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it. An investor could also sell a stock at a loss, register the loss, and then buy a similar investment.

That is, tax rules allow you to more than offset any gains. Savvy investors strategically use losses to minimize their taxable income through tax-loss harvesting. If you have a wash sale, however, you cannot claim the write-off until you finally sell the asset and avoid repurchasing it for at least 30 days.

A wash sale occurs when an investor sells a security at a loss and then purchases the same or a substantially similar security within 30 days, before or after the transaction. This rule is designed to prevent investors from claiming capital losses as tax deductions if they re-enter a similar position too quickly.

The wash sale rule states that if you buy or acquire a substantially identical stock within 30 days before or after you sold the declining stock at a loss, you generally cannot deduct the loss.

Note: Wash sales are in scope only if reported on Form 1099-B or on a brokerage or mutual fund statement. Click here for an explanation. A wash sale is the sale of securities at a loss and the acquisition of same (substantially identical) securities within 30 days of sale date (before or after).

The loss deduction isn't disallowed forever. It's only deferred. The loss incurred on the sale is added to the tax basis of the investment purchase that violated the rules.

You can't sell a stock or mutual fund at a loss and then buy it again it within 30 days just to claim the losses. You'll need to figure the basis for shares sold in a wash sale. When you do, add the amount of disallowed loss to the basis of the shares that caused the wash sale. These are the new shares you received.

The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated. So when in doubt, consult with a tax professional.

Can you avoid day trading rule? ›

In addition to having an offshore account, day traders can avoid the PDT Rule by trading foreign currency or futures. Neither of these asset classes require a certain level of cash. In fact, you can open an account with many brokers for just a few thousand dollars.

It is always possible to sell a stock for profit purposes, as the Income Tax Department has you paying taxes on the profit you make. This is, as mentioned earlier, a capital gains tax. You can buy the same stock back at any time, and this has no bearing on the sale you have made for profit.

While capital gains are considered on a calendar year basis, the wash sale covers a 30-day period, irrespective of the year. So if you sell an asset in mid-December, you still need to wait the requisite period before buying it again in January.