What is a "wash sale"?

By Steven Merkel AAA
A:

The Wash-Sale rule was established to disallow a loss deduction of a security sold, if within 30 days of the date of the sale an investor buys substantially identical stock or securities, or purchases options on the underlying security. The wash-sale period is actually 61 days, consisting of the 30 days before to 30 days after the date of sale.

For example, you buy 100 shares of XYZ tech stock on November 1 for $10,000. On December 15, the value of the 100 shares has declined to $7,000, so you sell the entire position to realize a capital loss of $3,000 for the tax deduction purposes. On December 25 of the same year, you repurchase the 100 shares of XYZ tech stock back again to reestablish your position in the stock. The initial loss will be not be allowed since the security was repurchased within the limited time interval.

However, there are some simple techniques that you can use to keep yourself in the market until the wash-sale period has expired. If you sold your 100 shares of XYZ tech stock on December 15, you could purchase a tech exchange-traded fund (ETF) or tech mutual fund to retain a similar position in the technology sector, although this strategy does not entirely replicate the initial position. When the 30-day period has passed, sell the index fund or ETF and then repurchase your XYZ stock if you so desire. Of course, the initial stocks can be repurchased prior to the end of the 30 day period, but the tax deductions will not be realized.
(To find out how you can pay less taxes, read Tax Breaks for Canadian Families.)

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