[ return to list ]
Wash Sales: How to Stay Dry at Year-end
Suppose you have realized capital gains from security sales earlier in the year, but now you are sitting on some paper losses. Normally, you can use capital losses at year-end to offset your capital gains plus up to $3,000 of ordinary income. However, if you are not careful, you could get soaked by the "wash-sale" rule.
How it works: Under the wash-sale rule, you are not permitted to deduct a loss from the sale of securities if you buy substantially identical securities within 30 days of the sale. So, you receive no tax benefit from the loss on your 2005 return. It doesn't matter if the purchase takes place before or after the date of the sale.
It is especially important to skirt around the wash-sale rule at the end of the year. For instance, if you are going to wait 31 days to buy back the same stock, you must sell the original stock by the end of November.
Note: There is a way you can realize a current loss under the wash-sale rule without waiting 31 days to repurchase the stock. This strategy is commonly referred to as "doubling up." By purchasing another block of shares first and then waiting more than 30 days to sell the original shares, you can maintain your current position while you preserve the tax loss.
Of course, taxes aren't the only factor at stake here. Nevertheless, it's important to keep the wash-sale rule in mind for year-end investment planning.