By: Ryan J. Wisniewski

When selling and purchasing stocks or other securities, it is important that taxpayers keep in mind Wash Sale Rules per Internal Revenue Code Section 1091.  Wash Sale Rules exist to discourage taxpayers from selling securities at a loss simply for the tax benefit.

A taxpayer cannot sell a security at a loss, and then turn around and repurchase that same, or substantially identical, security within 30 days, before or after the sale date.  If this occurs, the loss will be disallowed, and will instead be added to the cost basis of the new security purchased.  There will be no tax benefit to the taxpayer until a subsequent sale of that security in the future, assuming that the Wash Sale Rules are not again triggered.  That newly purchased security will take the holding period of the prior security that was sold for determination of future short-term or long-term capital gain/loss treatment.  (Note: Wash Sale Rules do not affect those that are in the business as a dealer in securities.)

Your broker will provide you with a Form 1099-B to assist in preparing your personal income tax returns for the year.  That form will typically report disallowed losses generated during the year due to Wash Sale Rules.  However, it is important to note that selling ABC Stock for a loss in one brokerage account, and then repurchasing ABC Stock within 30 days from a different brokerage account, will still trigger a Wash Sale, except this time you will need to manually keep track of this information.

If you would like to generate tax losses from the sale of securities in a particular year (also known as “tax loss harvesting”), but still maintain substantially the same level of involvement in the securities market, you can simply sell your security and immediately purchase a “similar”, but not “substantially identical” security (typically involves securities in the same corporation).  An example of this practice could include selling stock in Pepsi for a loss, and then immediately purchasing stock in Coca-Cola.  This will not trigger Wash Sale Rule limitations but maintain similar level of involvement in the securities market.

Please consult your R+R tax advisor for more information.

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