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

FAQs

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

So basically, if you want to avoid a wash sale, don't sell a stock for tax purposes and then buy the same one within 61 days of that sale. That means you can't buy shares of that same stock 30 days before your sale and 30 days after.

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

Some investors may think that they can reverse the order of a wash sale, buying more of the asset before they later sell less than 30 days later and declare a loss on it. But the IRS disallows this activity, since you may not buy 30 days before or after the sale and still claim a loss.

Keep in mind that the wash sale rule goes into effect 30 days before and after the sale, so you have a 61-day window to avoid buying the same stock. Alternatively, if waiting 61 days isn't feasible, you can purchase a security that is not substantially identical to the one you recently sold.

The Motley Fool sells stock regularly, too

We regularly give "sell" recommendations to our members and often for one of the reasons described above. There can be several valid reasons to sell a stock, and many long-term-focused investors frequently have reasons to offload parts of their holdings.

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.

To avoid a wash sale, the investor can wait more than 30 days from the sale to purchase an identical or substantially identical investment or invest in exchange-traded or mutual funds with similar investments to the one sold.

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 wash-sale rule keeps investors from selling at a loss, buying the same (or "substantially identical") investment back within a 61-day window, and claiming the tax benefit.

You can either buy something else that is not substantially identical or wait beyond the 30-day window to repurchase the shares. (You still have a wash-sale on the original sale and repurchase. You realize the loss on the subsequent sale.)

Do day traders worry about wash sales? ›

Generally, the wash sale rule applies to traders the same way it applies to investors. The difference is that traders have a much harder time keeping records relating to wash sales because they engage in so many transactions. There is a way for traders to escape the wash sale rule altogether.

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

The tax benefit of your capital loss isn't gone forever, but it's deferred. The loss on the original investment will be taken into account when you sell your replacement shares by applying the losses to your adjusted cost basis.

The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.

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If the customer sells 200 shares at a loss but has bought the same security within 30 days before or 30 days after the sell, then the sale is a wash sale. If the buy was for 100 shares, only the loss on 100 of the 200 share sale is disallowed and applied to the replacement shares.

Absolutely, you can buy and sell stocks within the same trading day. This dynamic strategy, known as day trading, is an integral part of the financial landscape and serves as the lifeblood for many traders.

How often can you buy and sell the same stock? You can buy and sell the same stock as often as you like, provided that you operate within the restrictions imposed by FINRA on pattern day trading and that your broker allows it.