Dollars & Sense - Wash Sales

If you’re looking for some tax deductions by selling stock on which you’ve got a loss be sure you don’t do what is called a wash sale. One way to reduce income taxes is to sell investments that you own on which you can deduct a loss. It’s important however not to incur what the IRS calls a “wash sale”. A wash sale occurs when you sell stock or securities at a loss and, within 30 days before or after that sale you directly or indirectly buy substantially identical stock or securities. The deduction of the loss won’t be allowed and your basis of the substantially identical asset is increased by the amount of the disallowed loss. If the number of shares of substantially identical stock purchased is less than the number of shares sold, you can determine the particular shares sold to which you want the wash sale rules to apply. As an example: If you bought 100 shares of XYZ stock on September 21, 2005 for $5000 and on December 28, 2005 you bought another 25 shares of substantially identical stock for $1,125. Then, on January 4th of this year you sold your original 100 shares for $4000 thinking you’d have a $1000 loss. Not so! Your December purchase of the 25 shares within 30 days of the sale makes it a wash sale. Your loss of $1000 gets reduced to only $750 because 25 shares of that sale will be reported under the wash sale rules.

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