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. Why isn't the U.S. dollar worth more than the British pound?

    When one country's currency is worth more than another, it does not necessarily indicate a stronger economy. Here's why. Read Answer >>
Related Articles
  1. Taxes

    How Taxpayers Can Do A Legal Wash Sale

    The wash sale rule can result in the disallowance of a much-needed deduction. Here you can learn what constitutes a wash sale and how to avoid it.
  2. Investing

    How to Reduce Taxes on ETF Gains

    Boost your returns by learning the tax tricks and loopholes for your exchange-traded funds, or ETFs.
  3. Taxes

    How to deduct stock losses from your tax bill

    Learn the proper procedure for deducting investment losses and get some tips on how to strategically structure them to lower your income tax bill.
  4. 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.
  5. 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.
  6. Taxes

    Capital Gains Tax 101

    Find out what a capital gain is, how it is calculated, how taxes are applied to your investment returns and how you can reduce your capital gain tax burden.
  7. Investing

    The Tax Consequences of Having Multiple Managers

    Having multiple firms or advisors manage your investments could result in adverse tax consequences.
  8. Trading

    Fix Broken Trades With the Repair Strategy

    You can recover from your losses if you know how to use this handy trader's tool.
  9. Taxes

    Do Your Research Before Claiming These Deductions

    Be sure to read the fine print about any deduction or credit that you’re planning to claim.
  10. Taxes

    Top Tax Deductions For Brokers

    If you are paying out of pocket, you can make your business expenses work for you at tax time.
RELATED TERMS
  1. Directional Trading

    Directional trading refers to strategies based on the investor’s ...
  2. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
  3. Share Repurchase

    A share repurchase is a program by which a company buys back ...
  4. Deduction

    A deduction is any item or expenditure subtracted from gross ...
  5. Retail Repurchase Agreement

    A retail repurchase agreement is an alternative to traditional ...
  6. Realized Loss

    Realized loss occurs when an asset which was purchased at a level ...
Hot Definitions
  1. Current Assets

    Current assets is a balance sheet account that represents the value of all assets that can reasonably expected to be converted ...
  2. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
  3. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  4. Cost of Debt

    Cost of debt is the effective rate that a company pays on its current debt as part of its capital structure.
  5. Depreciation

    Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account ...
  6. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained in a company’s financial statements.
Trading Center