Usually if you sell securities and the transaction results in a loss, you can use the loss to offset capital gains, plus up to $3,000 of ordinary annual income. Any excess loss over that amount is then carried over and can be used to offset losses next year. Because of these tax benefits, investors often “harvest” losses from securities sales, especially at the end of the year.
But there’s a potential stumbling block. Under the “wash sale rule,” you can’t claim a loss from a securities sale if you acquire substantially identical securities 30 days before or after the date of the sale. The loss is disallowed for tax return purposes.
What is considered substantially identical? Clearly, if you buy back the same stock it will trigger the wash sale rule, but not necessarily if it’s the stock of a company that’s merely in the same industry. However, transactions involving mutual funds within the same family of funds could cause a loss to be disallowed.
Frequently, a wash sale occurs when you reacquire securities you just sold at a loss because you believe the price is about to rebound. There are two relatively easy ways to avoid a wash sale.
If your loss is disallowed because of the wash sale rule, you can still find some tax solace. The amount of the disallowed loss is added to your basis in the shares you reacquired. Thus, when you eventually sell those shares, either your tax loss will be increased or your taxable gain will be reduced.
Contact us for guidance and application to your individual situation.
© MC 2017 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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