October 13, 2022 •HoganTaylor
Under the “wash sale” tax rule, if a taxpayer sells stock or securities for a loss and buys back substantially identical stock or securities within the 30-day period before or after the sale date, that loss can’t currently be claimed for tax purposes. This article provides some key details for taxpayers about this often-surprising rule.
If you’re planning to sell capital assets at a loss to offset gains you realized during the year, beware of the “wash sale” rule. Under this tax rule, selling stock or securities for a loss and buying back substantially identical stock shares or securities within 30 days before or after the sale date means the loss can’t currently be claimed for tax purposes. (This rule doesn’t apply to stock held within retirement accounts. The gain or loss activity in those accounts are not reported on your income tax returns.)
The rule
The wash sale rule is designed to prevent taxpayers from benefiting from a loss without actually reducing ownership in the investment. Note the rule applies to a 30-day period before or after the sale date. Wash sales will be reported on the broker statements when the buy and sales occur in the same account. For those taxpayers with multiple accounts, this could be problematic if the stock is sold in one account and acquired in another. If you participate in dividend reinvestment plans, the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan within the 30-day period.
Although the loss can’t be claimed currently, the disallowed amount is added to the cost of the new stock to increase the tax basis for the future disposition. (The acquisition date for the addition to basis is reset to the date the new stock is acquired.) The disallowed amount can be claimed when the new stock is finally sold.
An example
Assume you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 5 for $3,000. On November 29, you buy 500 shares of XYZ again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
If only a portion of the stock sold is repurchased, only that portion of the loss is disallowed. In the example above, if 60% of the shares sold were bought back, you’d be able to claim 40% of the loss on the sale. The remaining loss would be disallowed and added to your cost of the repurchased shares.
No surprises
The wash sale rule can deliver a nasty surprise at tax time.
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INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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