In the case of any loss claimed to have been sustained… Those are the first words of Internal Revenue Code Section 1091, which you may know as the wash sale rule. That particular sentence goes on for another 111 words. Yet you may sell a security and still not be sure whether the rule applies. That’s true despite the information reporting form you receive from your broker at year-end.
It might help to understand the reason behind the rule, which prevents you from claiming a current loss on certain investments you sell, then reacquire within a short time period. The idea is that in a wash sale, you’ve initiated a tax-saving transaction without changing your true economic position.
Here’s how wash sales work. When you buy a “substantially identical” security in the thirty-day window before you sell an investment and the thirty days after, any loss on the sale is postponed. Note that the rules include the day of the sale, so the window is 61 days.
Note, too, that the term “substantially identical” is not defined. The general rule is that stocks or bonds in different companies — even those in the same industry — are not substantially identical.
Wash sale rules apply to securities such as mutual funds, exchange-traded funds, and stock or option grants, including those you receive as part of your compensation. A wash sale can occur when you repurchase a security in your IRA, or when your spouse or a company you control does the buying.
Wash sale rules merely defer capital losses. In most cases you’ll eventually get the benefit, since the disallowed loss is added to the basis of the reacquired securities. The holding period of the original security is also carried over, creating planning opportunities.
Want to know more about wash sales? Give us a call. We are here to help ease your mind.