Tax planning: wash sale rules and warnings

Your Guide to State, Local, Federal, Estate + International Taxation

wash sale, security, investment, taxIf you’ve already filed your 2017 tax return, you may already be thinking about your 2018 return and ways to reduce your tax liability. One well-known strategy you can file away for year-end is to sell assets at a loss to offset gains that have been realized during the year. The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security within 30 days before or after you sell the security that generated the loss. You are able to recognize the loss only when you sell the replacement security.

Note that this rule applies even if you repurchase the security in an individual retirement account or Roth IRA.

But wait…there are ways to avoid or work around the wash sale rule and still achieve your investment goals:

  • Sell the security and immediately buy shares of a security of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
  • Sell the security and wait 31 days to repurchase the same security.
  • Before selling the security, purchase additional shares of the security equal to the number you want to sell at a loss. Then wait 31 days to sell the original portion.

Now that the wash sales rules have been touched on, be sure to contact your investment advisor as well as your tax advisor to take advantage of this tax planning strategy.

Danette Holguin, EA