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Nobody likes paying too much tax, right?

We may all agree, but when it comes to the sensitive topic of having to pay tax, the practice of using a wash sale is both clever, and silly at the same time. Let us explain why…

It’s clever because it’s a practice that means you can write off a security at a loss to avoid paying taxes. The big issue is that the IRS is familiar with this practice, and they have rules in place to stop anyone from performing a wash sale to avoid paying taxes.

In short, if you try to do a wash sale, you won’t save yourself on any tax.

What is a Wash Sale?

No, not a washboard!

NO, no, no, not washboard ABS! A wash-SALE….

A Wash sale involves an investor selling a security (typically a stock) at a loss. This is performed just before the financial year-end to avoid paying taxes on any gain or profits. With this artificial loss, the investor then buys the security back (or a very similar security) in the new financial year at a lower price.

Typically, the selling and buying take place within a relatively short period of time and the Wash-Sale Rule considers any security or similar security that has been purchased within 30 days of being sold.

In recent years, we have dealt with a number of cases where individuals aren’t aware that the losses on these securities are excluded from being claimed. If you are concerned that you might be in a similar situation, give us a call today.

What is the Wash-Sale Rule?

The Wash-Sale rule is a regulation that the IRS uses to exclude losses from being claimed. It outlines what is classed as a Wash Sale and bans any claims made from the practice.

Although many people have not heard of this rule, it was actually introduced in the 1920s! The rule has come into the spotlight recently mostly because of the pandemic with many brokers reporting adjusted costs to investors.

The Wash-Sale rule also outlines which securities the rule applies to, including mutual funds and ETFs (exchange-traded funds).

Multiple accounts, still count

The Wash-Sale Rule also applies to having multiple accounts, including if your partner or spouse buys a similar security to what you sold! As well as making the tracking of transactions more complex, this also means that you can’t (and shouldn’t!) try to avoid the rule by using multiple accounts.

A quick example of how it works…

Imagine you buy 10 shares in a company for a total investment of $5,000. A few weeks later, you sell the shares for $3,000 resulting in a capital loss of $2,000. That’s potentially a $2,000 loss you can claim for tax deduction purposes.

If, a few weeks later, you then buy another 10 shares of the same company then the initial $2,000 loss can no longer be claimed, as the re-purchasing of shares happened within the time-frame stated by the Wash-Sale Rule. You will still be able to deduct the losses when you sell the security in a non-Wash-Sale transaction in the future.

Need help with your personal finances?

For more information on what the Wash-Sale Rule is, and how it applies to your circumstances, get in touch with My Numbers Guy. We would also be happy to provide support with all of your personal taxes and reporting to ensure you pay only the tax that you need to.

Call My Numbers Guy today at 484-544-3755.