If you buy and sell stocks on a regular basis, you should take the time to educate yourself about the wash sale rule. The wash sale rule was instituted into the U.S. tax code as part of IRS Code 550, and it’s a very important rule for those who buy and sell stocks. It’s designed to prevent people from claiming a tax loss on investments that they still hold.
How exactly does the wash sale rule operate?
Well, let’s say you buy a stock for $10 hoping that the price of it would go up over time. However, once you buy it, the price of the stock starts heading in the wrong direction and dips to $9. Then, it continues to dip and hits the $8 mark before long. At that point, you might decide that you’re going to sell the stock and hope that it goes even lower, at which point you’ll buy it back and regain some of your losses when the stock turns around.
You’re more than welcome to take this approach, but you should be aware of how it could affect you come tax time. A wash sale occurs if the taxpayer sells or disposes of stock or securities, and within 30 days before or after the disposition date (a 61-day period) the taxpayer acquires substantially identical stock or securities. Stock and securities acquisitions include contracts and options to acquire them, and acquisition by the taxpayer’s traditional IRA or Roth IRA. A loss disallowed because of the wash sale rule is added to the cost basis of the new stock or securities unless they are acquired through an IRA. The IRS put this rule into place to stop people from claiming tax losses on stocks that are actually still a part of their portfolio.
To steer clear of running into issues with the wash sale rule, you should closely monitor all the trades you make in the stock market throughout the year and avoid putting yourself into a position where you might make a wash sale. You should also wait the appropriate amount of time to buy a stock you owned in the past to prevent any problems with the IRS as it pertains to the wash sale rule. That might mean waiting up to 61 days.
If you’re confused about the wash sale rule and want to make sure it doesn’t affect you, let Trader’s Accounting tell you more about it. We offer trader tax services that’ll allow you to spend more time buying and selling stocks and less time trying to figure out the tax codes. Contact us today for additional information.