Wash Sales

Today TaxMama hears from Kay in New Jersey, who has done some thinking. “I am an investor in the stock market. How can I avoid a wash sale? For example I own 100 shares of stock A and want to sell it to help offset my capital gains for 2009. However I do not want to wait 30 days to buy that same stock. Any advise on how to avoid the wash sale problem?”

First of all, let’s explain wash sales to folks: When you sell a stock and buy it back within 30 days before or after the sale, IRS rules treat that, essentially, as if you had never sold the stock at all. You just adjust the basis for costs.

So, Kay, you can’t avoid that trap, at least not legally. Or at least, not in the same account.

I suppose you could sell the stock in one brokerage account and buy it in another. But I don’t think you can do that either.

Of course, you could consider selling it in your brokerage account and buying it back in your IRA. But…that’s been outlawed too, in recent rulings. So, I can’t see any way to avoid it except to wait at least 31 days to replace the stock. For more advice, talk to your broker, or a tax expert on investments.

And remember, you can find answers to all kinds of questions about capital gains and losses and other tax issues, free. Where? Where else? At TaxMama.com.

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One thought on “Wash Sales

  1. treasur2 says:

    I was an EA student of yours and now have a tiny, tiny, tiny practice (3 paying customers, 7 total).
    I used to be in securities business (series 7) 25 years ago. I am too analytical so I failed and hated sales. I love details and technical knowledge. So after short career in I.T. I’ve returned to financial services as tax person. Don’t need income, just love research and knowledge.

    Question: Wash sale rule says “substantially” referring to the security one buys after selling within the 60 day window. However, what I see time and again, is that almost any security that is not the EXACT same security will suffice.

    Specifically, if I own mutual fund A, sell it, and buy ETF A, which owns the exact (yes) same securities, because it is just the a different share class of the mutual fund. The IRS sees this as “different” security. Now, I am aware that technically it is a different legal animal…slightly. That whole issue\argument etc. However, the point of the rule, correct me if I am wrong, is to keep people from “washing” a sale with a subsequent\prior buy.

    Many of the Vanguard ETF’s are run the above way.

    Or if I sell Investment company international index fund A and then buy Investment Company international index fund B, the IRS sees this as NOT …..a “substantially” same security.

    Seems like this rule functions very little of the time, where it was intended to function a great deal. Seems to me like it is easily abused.

    Again, I speak only theoretically. I actually have zero experience with it doing returns.

    Can you comment and/or point me to blog or other through discussion of subject. Interests me a great deal.

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