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.)

  1. If a country's currency is determined by the strength of its economy, why isn't the ...

    Generally speaking, when Country A's currency is worth more than that of Country B, it does not necessarily mean that Country ... Read Answer >>
Related Articles
  1. 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.
  2. 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.
  3. 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.
  4. Financial Advisor

    How to Avoid Violating Wash Sale Rules When Realizing Tax Losses

    How to avoid violating the IRS wash sale rules when realizing capital losses in your taxable investment account.
  5. 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.
  6. Taxes

    The Most Overlooked Tax Deductions

    The receipts you cram into your wallet could be replaced with cash come tax season.
  7. Taxes

    Want A Bigger Tax Refund? Don't Itemize

    Six reasons why many taxpayers can save money and time by claiming the standard deduction.
  8. Taxes

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
  9. Taxes

    Cut Your Tax Bill

    Paying your bills early or giving an extra donation now can help you come tax time.
  10. Taxes

    7 Commonly Overlooked Tax Deductions

    Don't pay more taxes than you have to because you've missed taking legitimate tax deductions. Here are just a few you may have overlooked.
  1. Wash-Sale Rule

    A regulation that prohibits a taxpayer from claiming a loss on ...
  2. Robo Tax Loss Harvesting

    The automated selling of securities in a portfolio to deliberately ...
  3. Directional Trading

    Directional trading refers to strategies based on the investor’s ...
  4. Specific-Shares Method

    A personal financial accounting method that, when used properly, ...
  5. Tax Selling

    A type of sale whereby an investor sells an asset with a capital ...
  6. Capital Loss

    A capital loss is the loss incurred when a capital asset that ...
Hot Definitions
  1. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  2. Standard Deviation

    A measure of the dispersion of a set of data from its mean, calculated as the square root of the variance. The more spread ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small business and assumes all the risk and reward of the venture.
  4. Money Market

    The money market is a segment of the financial market in which financial instruments with high liquidity and very short maturities ...
  5. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  6. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
Trading Center