Investment Center
Articles: Securities Sales: STAY DRY
If you sell securities, you could be soaked by the “wash sale rule” if you are not careful. How it works: The wash sale rule prohibits you from claiming a tax loss on the sale of securities if you acquire “substantially identical” securities within 30 days of the sale.
But it is relatively easy to avoid the wash sale rule. One obvious strategy is to wait at least 31 days before you repurchase the same securities. Alternatively, you can double up on your investment.
Example: Ms. Smith bought 100 shares of XYZ stock at $50, and now is selling at $40. Instead of selling the shares, she buys 100 more shares of XYZ stock at $40. Then she waits more than 30 days and sells the first 100 shares at $42. Result: Smith has a deductible loss of $800 and now holds 100 shares showing a paper gain of $200.
If a tax loss is denied because of the wash sale rule the disallowed amount is added to the basis in the stock.
Of course, other economic factors beside taxes should enter into your investment decisions. But do not forget about this tax trap.
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