Wash-Sale Rules | Avoid this tax pitfall | Fidelity (2024)

FAQs

Wash-Sale Rules | Avoid this tax pitfall | Fidelity? ›

The wash-sale rule keeps investors from selling at a loss, buying the same (or "substantially identical") investment back within a 61-day window, and claiming the tax benefit.

First, the simplest way to avoid a wash sale is to be mindful of the 30-day rule. The wash-sale rule only applies when you purchase a substantially identical security 30 days before or after selling the original security for a loss. As long as you avoid that 30-day window, you won't be violating the rule.

To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it. An investor could also sell a stock at a loss, register the loss, and then buy a similar investment.

Q: How does the wash sale rule work? If you sell a security at a loss and buy the same or a substantially identical security within 30 calendar days before or after the sale, you won't be able to take a loss for that security on your current-year tax return.

However, if you violate the wash sale rule, any loss from the sale of stock or securities is disallowed for tax purposes and can't be deducted from your capital gains or ordinary income. A disallowed loss is not completely wasted, though.

The IRS instituted the wash sale rule to prevent taxpayers from using the practice to reduce their tax liability. Investors who sell a security at a loss cannot claim it if they have purchased the same or a similar security within 30 days (before or after) the sale.

Therefore, a taxpayer must satisfy two requirements to be exempted under section 1091(a) from the wash sales rule. First, the taxpayer must be a dealer, and second, the losses must have been sustained in the dealer's ordinary course of business.

If you have a wash sale, however, you cannot claim the write-off until you finally sell the asset and avoid repurchasing it for at least 30 days. After that period, you can re-buy the asset without triggering the wash-sale rules.

One strategy for avoiding wash sales in options trading is to wait at least 31 days before repurchasing a similar contract. Another strategy is to purchase a different options contract that is not considered substantially identical to the one that was sold at a loss.

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

Why would someone want a wash sale? ›

The wash sale rules are designed to prevent people from selling investments and then buying the same stock back. Investors do this for the sole purpose of: Creating a deductible loss. Using the loss to offset other shares sold for a gain.

If you hold a stock for one year or longer, your gain will be taxed at the long-term capital gains tax rate. But if you hold a stock for less than one year before selling it, your gain will typically be taxed at your ordinary income tax rate.

The simplest way to avoid violating the wash sale rule is to do nothing for the first 30 days after selling the asset. For example, if you wait 31 days to repurchase an asset, the rule doesn't apply, and you can deduct the loss and enjoy your new capital gains.

Wash sale losses are never permanent since they are carried with the cost basis of an active position. Assuming at some point in the future you exit that position, the wash sale loss will be recognized.

Keep in mind that the wash sale rule goes into effect 30 days before and after the sale, so you have a 61-day window to avoid buying the same stock. Alternatively, if waiting 61 days isn't feasible, you can purchase a security that is not substantially identical to the one you recently sold.

Just as how long you have to wait to sell a stock after buying it, there is no legal limit on the number of times you can buy and sell the same stock in one day. Again, though, your broker may impose restrictions based on your account type, available capital, and regulatory rules regarding 'Pattern Day Traders'.

It is always possible to sell a stock for profit purposes, as the Income Tax Department has you paying taxes on the profit you make. This is, as mentioned earlier, a capital gains tax. You can buy the same stock back at any time, and this has no bearing on the sale you have made for profit.

A Wash Sale occurs if you sell securities at a loss and buy substantially identical replacement shares within 30 days before or after the sale. The Wash Sale Period is 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).