What is a wash sale? A wash sale is an investment transaction in which an investor sells a losing security to claim a capital loss, but within 30 days before or after the sell, repurchases it (or a substantially identical security) again. The clock for counting the 30 days, begins the day AFTER you purchase the stock regardless of whether the next day is a weekday or weekend, the 30 days includes saturdays and sundays. Wash sales also apply to options, but I’ll focus mainly on stock wash sales.
The wash sale rule as stated by the IRS is a regulation that prevents an investor from taking a tax deduction for a security sold in a wash sale. Since the loss is disallowed because of the wash sale rule, the investor has to add the loss to the cost of either existing shares or the new shares just purchased, which adds the loss to the cost basis of the shares either already owned or newly acquired to negate the effect of the loss. Why this was put into place was to prevent investors from intentionally taking tax losses on stock positions, buying the same stock again, and then realizing the tax loss by reducing capital gains.
Wash sales apply more to the short term investor looking to achieve an optimal purchase price for their stock positions.
Averaging down is an investing strategy in which an investor purchases additional shares of a previously initiated investment after the price has dropped further. The result of this second purchase is a decrease in the average price at which the investor purchased the stock.
If you make a trade and sell it in the money at a profit, there is no wash sale. When selling at a loss you can’t buy back the same stock for 30 days. When buying a stock that you already own, you restart the 30 day clock.
To summarize, the first example is just taking a loss on a stock. The second example is moving the wash sale onto 1 of your other bunches of shares, both bunches are out of the money. The third example is owning 2 bunches of shares and wanting to take a loss on 1 bunch of the shares without a wash sale. Fourth example is 2 bunches of shares 1 in the money and 1 out of the money, you can sell both at the same time without a wash sale. Fifth example is if you own 2 or more bunches of shares and you want to take the loss on all of the shares to avoid a wash sale.
Why would someone want to take a loss or create a wash sale if it wasn’t done by accident?
• Price Optimization - By taking a wash sale and adding the hopefully minimal loss onto a new or existing cost basis, you hope to buy the same stock back at an even lower price.
• Margin Interest - Margin interest is accruing and it’s hard to sit on losing trades while paying interest on them.
• Lost interest in the stock - Changed your mind about how you feel about a stock, maybe there was news that adversely impacts that company and you want to move on to something else.
Something to keep in mind as you invest to determine whether you are trading or investing depending on if you are a long term investor or short term investor. If timing matters, then you are trading. A long term trader thinks less about timing than a short term investor, so as you are investing, think about if timing matters to you before you buy.
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Disclaimer: This is not a sponsored video. I do not own (PG) or have plans to initiate any (PG) positions within the next 72hours.
The ideas, contents and opinions presented in this video are for entertainment purposes only. Bryan does not give tax or investment advice. All information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor. Past performance is not indicative of future results. All investing involves risk, including the possible loss of principal. Bryan is not a Financial Advisor, Tax Advisor or CPA/Accountant. Only you are responsible for the financial decisions that YOU make.
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3 авг 2024
