The Wash Sale Rule – Part 2

Related Post The Wash Sale Rule – Part 1

Ok ,so we know that there is a 61 day period of time that we need to pay attention to and we know that we can not buy back securities that are substantially identical to the investment that we took a loss on.

But, what happens to the loss that is disallowed by the wash rule?

In our last post on this topic, we had a loss in Microsoft (MSFT:NASDAQ) of $1000. Let’s just say that we were unaware of the wash sale rule and bought the stock back four days later. We paid $62 per share for a total of $6,200. By doing this we are disallowed from taking the loss as this is considered a wash sale.

The disallowed loss of $1000 gets added to the new stock basis.

wash sale 1

The disallowed loss of $1000 is not lost forever. It is simply carried over until the next time you sell the stock. This is assuming that you observe the thirty day rule and do not purchase a substantially identical investment.

The wash sale rule is complicated but is something that needs to be considered for active traders.

Short sales are also included in the wash sale. If you short a stock, buy it back and then short it again within the thirty day period, that is a wash sale.

Another caveat is that the holding period of the new stock is the same as the “wash sale stock”.

What if you would really benefit from taking a loss but feel that the stock could go up?  In this case, you could buy a sector index fund. continuing the example with Microsoft (MSFT:NASDAQ). Technology stocks  may have a tendency to move together so you could consider buying a sector index fund dedicated to technology.

 

DISCLOSURE: THIS ARTICLE IS NOT INTENDED TO BE INVESTMENT OR TAX ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. PLEASE CONSULT A QUALIFIED TAX OR FINANCIAL ADVISOR TO DETERMINE HOW OR IF THE TOPICS DISCUSSED HERE MAY OR MMAY NOT APPLY TO YOUR OWN SITUATION.