Know the 61 day window and “substantially identical” investments.
The “Wash Sale ” rule refers to the IRS regulation that disallows a loss on a stock when “substantially identical” investments are purchased thirty days before or thirty days after the loss is taken. You can not take a loss on a stock and then buy an investment that will give you the same beneficial interest as owning the loss stock.
There is a window of sixty one days that needs to be considered for a wash sale. Let’s say that you sell 100 shares of Microsoft, that you bought twenty years ago, on December 31st for a loss of $1000. These are the key dates:
1.) December 1st – thirty days before the sale at a loss. If you purchased 100 shares or a “substantially identical” investment at any time between December 1st and through December 30th, you will be unable to take the loss of $1000 from the sale on December 31st.
2.) December 31st – this is the day of the sale at a loss. If you buy shares or a “substantially identical” investment today before or after the sale of the loss shares, it is obviously a wash sale and the loss is disallowed. This date is most important because it starts the clock ticking forward and defines the thirty day look back period.
3.) January 30th – this is thirty days after the loss sale. If you buy shares of the same or “substantially identical” investments on this day, the wash sale rule applies.
On January 31st, thirty one days after the loss sale, you may repurchase shares of the stock or substantially identical investments and not be subject to the wash rule.
Nothing with the IRS can be simple, can it? Of course not!
What is meant by substantially identical?
As a general rule, stock of one company is not substantially identical to shares of stock in another company, even if they are in the same industry. For example, Walmart (WMT:NYSE) and Target (TGT:NYSE) are not substantially identical. You can take a loss in one and buy the other.
A call option on a stock would be considered substantially identical to the stock. The call option will largely give you the same benefit of the stock movement and does not change your position on the stock.
A warrant bought on the stock will be considered substantially identical.
Certain types of preferred stocks and convertible bonds will be considered substantially identical, depending on certain features of them such as convertibility, voting rights and dividend restrictions.
A loss sale of stock by one spouse and the subsequent purchase by the other spouse will be considered substantially identical and a wash sale.
A loss sale of stock in a brokerage account and a subsequent purchase in an IRA account will be considered substantially identical and a wash sale.
A loss sale of stock by an individual and a subsequent purchase by a corporation that the individual controls will be considered substantially identical and a wash sale.
Source: IRS Publication 550
DISCLOSURE: THIS ARTICLE IS NOT INTENDED TO BE INVESTMENT ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. PLEASE CONSULT A QUALIFIED ADVISOR TO DETERMINE THE MOST APPROPRIATE INVESTMENTS FOR YOUR PERSONAL SITUATION.