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Selling investments at a loss can be a way to reduce your tax bill if you had a good year in the market.
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However, inexperienced investors often fall for a tax trap called the “wash sale rule”. Here’s how it works & how to avoid it.
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A thread:
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However, inexperienced investors often fall for a tax trap called the “wash sale rule”. Here’s how it works & how to avoid it.
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A thread:
The wash sale rule was put in place by the government to stop people from “gaming the system”
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Before this rule, investors could buy investments and quickly sell them so they could deduct the losses from their gains, lowering their tax bill
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Before this rule, investors could buy investments and quickly sell them so they could deduct the losses from their gains, lowering their tax bill
If you’re subject to the wash sale rule, the IRS does NOT allow you to claim the loss you incurred.
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If you’re looking to manage your losses strategically, you need to know how this rule can affect you.
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Here’s how it works
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If you’re looking to manage your losses strategically, you need to know how this rule can affect you.
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Here’s how it works
Best way to understand the wash sale rule is to think in terms of a 61 day window:
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-The date of the sale @ a loss
-30 days before the date of the sale
-30 days after the date of the sale
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Keep in mind, this only applies if you sell at a loss.
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-The date of the sale @ a loss
-30 days before the date of the sale
-30 days after the date of the sale
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Keep in mind, this only applies if you sell at a loss.
The wash sale rule applies if you bought shares of the same investment that you sold @ a loss either:
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- 30 days before the sale
- or if you repurchase shares of the same investment within 30 days of the sale
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Here’s a visual
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- 30 days before the sale
- or if you repurchase shares of the same investment within 30 days of the sale
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Here’s a visual
This is why it’s important to check to see if you bought shares of the same investment within 30 days of the date you want to sell @ a loss.
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You also want to make sure at least 30 days have passed if you want to repurchase shares of the same investment you sold
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You also want to make sure at least 30 days have passed if you want to repurchase shares of the same investment you sold
If you repurchase the shares, instead of being able to deduct the loss from other capital gains, the loss is added to the cost basis of the repurchased shares.
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Ex: you had a loss of $1000. You repurchase shares @ $5000. Your adjusted cost basis is $6000
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Ex: you had a loss of $1000. You repurchase shares @ $5000. Your adjusted cost basis is $6000
Remember, you can only deduct losses that occur in taxable accounts (not IRAs, 401ks, etc)
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However, the wash sale can still apply if you sell shares at a loss in your taxable brokerage account and repurchase them in your IRA within 30 days
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However, the wash sale can still apply if you sell shares at a loss in your taxable brokerage account and repurchase them in your IRA within 30 days
As always, make sure you consult with a tax advisor & focus on your own individual tax picture.
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Knowing the rules around portfolio taxation is a major
, especially as your portfolio grows.
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Hope that helps.
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Knowing the rules around portfolio taxation is a major
, especially as your portfolio grows.⠀⠀⠀⠀⠀⠀⠀⠀⠀
Hope that helps.
