What Is The Wash-Sale Rule?
Investments are an essential aspect of personal finance, ensuring that you can safeguard your money from inflation and rising living costs. The IRS has many rules in place for buying and selling stocks, and if you’re a seasoned investor, then chances are that you’re aware of some of these rules. However, you also want to ensure that you don’t accidentally find yourself in a difficult position with the IRS, which is why knowing the wash-sale rule is essential to keep your taxes clean.
The Wash-Sale Rule
The wash-sale rule prevents an investor from taking the tax deduction of a stock sold in a wash-sale. Suppose you sell an asset for a loss and then purchase the asset again a month before or after the sale. Doing this will make it appear as though you are no longer the person who owns the property or the stock, even though you do. This tool exists because investors can’t reap the benefits of a tax loss due to selling the asset without actually selling the asset.
The Wash-sale rule also applies when your spouse or a company in your name buys the same asset you previously owned. You need to be aware of the wash-sale rules so that you don’t accidentally avoid a tax loss.
How Does the Wash-Sale Rule Work?
Most investors still have trouble understanding how the wash-sale rule may be applied to their assets. Let’s break it down with an example: Suppose you buy 100 shares for $12 per share, and a few weeks later, you decide to sell these shares, but the price has gone down to $10 per share, so you incur a loss of $200. But you buy the 100 shares again for $11 per share within 61 days.
If such a situation exists, you won’t be able to claim the benefits of the tax loss of $200. Your new tax basis would be $1100 plus the disallowed $200, making it $100 greater than the initial loss you had incurred. Therefore, when buying similar assets, you need to be aware of the wash-sale rule, so you don’t lose the benefits of a tax loss. The rule can be quite complicated, so you must ask a professional for help when strategizing your finance.
Ways to Avoid Wash-Sale Rule
Wait for 30 to 61 days
One of the best ways to avoid triggering this rule is by waiting for 30 to 61 days before you buy the same asset or one that’s identical. The waiting period ensures that you can still claim the tax.
Buy a Different Security
If you still want to invest that money, consider buying a different security altogether. You could buy the same security in a different sector or type.
Use a Mutual Fund
The wash-sale rule will not be triggered if you use a mutual fund to buy the same security. These funds allow you to have various portfolios to choose from, reducing the possibility of triggering the rule.
Knowing the rule and how it works is important so you may find ways to avoid it altogether. However, you should consult a professional when the money you may lose is large, as the regulation can be quite complex.
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