The Wash Sale Rule

At the end of every year, I look over my stocks (not many -- most of my investing is done in index funds) and decide whether or not I should sell any. One factor I consider is how much capital gains income I've accumulated during the year and if there are any stocks I want to get out of that are currently at a loss. If there are any, I can offset my capital gains with losses from selling the under-performing stocks.

But what if I still like the stock and want to own it? Can I simply sell the stock for a loss, take the loss this year, then buy it right back again? Well, I can sell the stock at a loss and then buy it back again, but I can't take the loss off my taxes. Why? Because of the wash sale rule. Here are the details on it from Kiplinger's:

There are special rules if you want to buy the stock back again. Under the "wash sale" rule, you can't deduct the loss if you buy the same stock within 30 days before or after you sell it. If you think the stock will eventually rebound, it's a good idea to keep an eye on your calendar before buying it back.

No, you can't deduct the loss now if you sell and buy back in 30 days, but you will eventually get it back:

If you do buy the stock back within 30 days, though, you don't lose the loss forever. A loss denied by the wash sale rule is added to the cost basis of the newly purchased shares. That will lower your tax bill when you finally sell the new shares.

My decisions usually ride on whether or not I like the stock in the long term. If I do, I keep it. If I don't, I sell it and don't plan on re-buying it. As such, the wash sale rule doesn't really impact how I buy and sell stocks. But some of you out there may want to keep it in mind if you come upon a situation where you need to take the loss but still like the stock.

Comments

[Kevin]

This rule also applies to funds, not just individual stocks. One thing you can do is move your money to a similiar fund/stock. If you like at&t for example, sell and move the money over to verizon. Funds are even easier, as there are thousands out there with similiar investment strategies, finding a large cap growth isn't exactly hard.

[Bill aka NO DooDahs!]

Technically, the rule prevents "substantially identical" stocks and/or funds from being bought and still having the loss be deductible.

http://www.fairmark.com/capgain/wash/ws101.htm
http://www.fairmark.com/capgain/wash/wsident.htm

I'm not a lawyer or accountant. From the sources I've read, I think I'd probably be safe buying stock in another company in the same industry, such as Kevin mentioned, but I don't think I'd be safe buying another mutual fund or ETF that tracked the same INDEX, e.g. selling IVV and buying back SPY.