A wash sale occurs when you sell a stock, bond, or mutual
fund and buy the same or a substantially identical security within 30 days
before or after the sale. When this happens, you're barred from deducting a tax
loss on the sale. Instead, your cost basis of the new security is increased by
the loss.
Example: Say you sell 100 shares of XYZ mutual fund at a
loss of $3 per share. A week later, you regret your decision and buy another
100 shares of XYZ fund. Your original loss of $300 will be disallowed, and
you'll add the $300 to your cost basis in the new shares.
The rules apply to losses generated by transactions
involving "substantially identical" stocks and securities, including
mutual funds and stock or option grants you receive as part of your
compensation. Whether one security is considered substantially identical to
another depends on several factors. Generally stocks or bonds in different
companies - even those in the same industry - are not substantially identical.
Be aware of a possible trap if you use an automatic purchase
plan or dividend reinvestment plan. If these plans cause you to acquire more
shares of a stock or fund within 30 days of a sale, the wash sale rules will
apply to your sale.
Wash sales can also occur when you repurchase the security
in your IRA, or when your spouse or a company you control does the buying.
How can you avoid a wash sale? You can avoid a wash sale if
you make your purchase more than 30 days before or after the sale date. Also,
you can buy shares in a different but similar stock or mutual fund without
triggering a wash sale.
If you have questions about the wash sale rules, please call
us at (518) 798-3330.
