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. (See also: Tax Breaks for Canadian Families.)

RELATED FAQS
  1. What is the difference between a long position and a call option?

    Learn what a long position in a stock is, what a call option is, and the difference between owning shares of a company and ... Read Answer >>
  2. Why would my stock's value decline despite good news being released?

    More often than not, when a firm releases an earnings report the market will react to this news by adjusting the firm's stock ... Read Answer >>
  3. Which is better for tax deductions, itemization or a standard deduction?

    Each deduction that you claim may result in a decrease in the amount of taxes that you owe. However, whether you receive ... Read Answer >>
Related Articles
  1. Retirement

    Can IRA Transactions Trigger The Wash-Sale Rule?

    In 2008, the IRS said: Yes, they can. Find out what this means and how to avoid penalties.
  2. Investing

    A Complete Guide to Tax Loss Harvesting With ETFs

    Using exchange-traded funds (ETFs) to harvest tax losses can be a smart way to maximize your portfolio's tax efficiency.
  3. Investing

    How To Reduce Taxes On ETF Gains

    Boost your returns by learning the tax tricks and loopholes for your exchange-traded funds.
  4. Investing

    What Is Year Over Year?

    Year over year measures performance in one time period versus performance in a previous time period.
  5. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  6. Taxes

    How Are Futures & Options Taxed?

    We present a basic introduction to the US tax processes of futures and options.
  7. Taxes

    7 Ways To Minimize Your 2014 Taxes By December 31

    The year's not quite over yet. See whether taking any of these steps would leave you owing less in 2014 taxes, come April.
  8. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your capital gain tax burden.
  9. Financial Advisor

    How to Optimize Taxable Portfolios in Bear Markets

    A bear market presents an opportunity for financial advisors to optimize clients' taxable portfolios.
  10. Taxes

    How Your Government's Budgetary Decisions Impact the Public Sector

    Issues facing the public sector are not unlike some issues facing America’s oldest and largest companies, but with larger and broader impacts.
RELATED TERMS
  1. Robo Tax Loss Harvesting

    The automated selling of securities in a portfolio to deliberately ...
  2. Short (or Short Position)

    A short position is the sale of a borrowed security, commodity ...
  3. Wash Trading

    The process of buying shares of a company through one broker ...
  4. Direct Repurchase

    The buying of shares in a publicly-traded company by the company ...
  5. Directional Trading

    Trading strategies based on the investor’s assessment of the ...
  6. Tax Deduction

    A deduction from gross income that arises due to various types ...
Hot Definitions
  1. Short Covering

    Short covering is buying back borrowed securities in order to close an open short position.
  2. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  3. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  4. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  5. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  6. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
Trading Center