| Understanding the Wash Sale Rule |
The IRS Wants Your Money Stock traders always want to make profits on their trades. But when the inevitable losses do come, they also want to be able to save some money on their taxes by writing those losses off. However, the Internal Revenue Service (IRS) wants to get your money too.  So to make sure stock traders play fair and only take tax write offs on losses they have actually realized, the IRS created the Wash Sale Rule. A wash sale is the sale of a stock or security that is closely followed by a repurchase of the same, or significantly similar, stock or security. For instance, if you sold 100 shares of General Electric (NYSE: GE) one day and then turned around and bought 100 Shares of General Electric the next day, it would be considered a wash sale. After all, when you look at it over a longer period of time, what you did doesn't really count as a sale because you just turned around and bought the stock again. It is as if you never sold the stock in the first place. Why Would a Stock Trader Execute a Wash Sale? A stock trader would execute a wash sale to take advantage of the tax benefits that come from selling a stock at a loss. Imagine you have a stock trade that has lost $1,000. You know that if you sell the stock, you can realize a $1,000 loss on your tax return and lower the amount of money you owe Uncle Sam. So you decide to sell the stock. However, you also believe that the stock is going to go back up in value, and you want to take advantage of the stock growth too. So after you have sold the stock to take advantage of the tax write off, you buy the stock back to enjoy the upside growth. What is the Wash Sale Rule? The Wash Sale Rule is a rule the IRS implemented to prevent stock traders from having their cake and eating it too. Here is the Wash Sale Rule, according to Publication 550: "You cannot deduct losses from sales or trades of stock or securities in a wash sale. 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: 1. Buy substantially identical stock or securities, 2. Acquire substantially identical stock or securities in a fully taxable trade, 3. Acquire a contract or option to buy substantially identical stock or securities, or 4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale."
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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