Phoenix CPA|Wash Sale Rule
As we approach the end of the income tax year, investors might be thinking about tax-loss harvesting, which can be a great way to offset capital gains taxpayers may have had during the year on more successful investments. One thing taxpayers need to be aware of before doing this is the dreaded wash sale. Wash sales occur when an investor sells a particular stock and then buys the same stock less than 30 days later. The IRS will disallow the loss and not allow the taxpayer to benefit from it, essentially treating the sale as though it never happened. So what happens to the loss on the sale of the stock? Do you lose it forever? The answer is no. The loss on the sale of the stock that is deemed a wash sale is added to the basis in the stock you bought within the 30 day window, which will lower the capital gain amount you will have when you eventually sell the stock off for good. For an example, let’s say you bought 100 shares of XYZ stock for $100. You then sell the stock on December 20th for $50. You would normally have a capital loss of $50 that you could use to offset capital gains you had during the year, but in this case you bought 100 shares of XYZ stock on January 3rd for $60. In a normal situation you would have basis in the new stock of $60, but because it’s the same stock you sold less than 30 days ago, your basis is increased by the disallowed loss, resulting in basis in the stock of $110. Now you sell the stock for $150 on June 10th. You would have a capital gain of $40 (basis of $110 from the new purchase price of $60 plus the $50 disallowed wash sale loss). So when you go to harvest capital losses to offset capital gains be careful not to purchase the same stock within 30 days, or you will get stuck with a wash sale. For further detail or if you have any questions, feel free to contact us at Dusseau & Makris, PC, your local Phoenix CPA firm.