What if You Sell Again at a Loss After Wash Sale
Primal takeaways
- The launder-auction rule prohibits selling an investment for a loss and replacing it with the aforementioned or a "substantially identical" investment 30 days earlier or afterward the sale.
- If y'all do have a wash auction, the IRS will not permit y'all to write off the investment loss which could make your taxes for the twelvemonth higher than you hoped.
Yous may have seller's remorse in a down market. Or y'all may be trying to capture some losses without losing a great investment. All the same it happens, when you sell an investment at a loss, it's important to avert replacing it with a "substantially identical" investment thirty days before or thirty days after the sale date. It'southward called the launder-auction rule and running afoul of it can atomic number 82 to an unexpected tax pecker.
What is the wash-sale rule?
When you sell an investment that has lost money in a taxable business relationship, y'all tin can get a tax benefit. The wash-sale dominion keeps investors from selling at a loss, buying the same (or "essentially identical") investment back within a 61-day window, and claiming the tax benefit. Information technology applies to most of the investments yous could hold in a typical brokerage account or IRA, including stocks, bonds, mutual funds, commutation-traded funds (ETFs), and options.
More specifically, the wash-auction rule states that the taxation loss volition be disallowed if you buy the aforementioned security, a contract or choice to buy the security, or a "substantially identical" security, within 30 days before or after the date you sold the loss-generating investment (it's a 61-solar day window).
It's important to annotation that y'all cannot get effectually the launder-sale rule past selling an investment at a loss in a taxable account, and then buying it back in a tax-advantaged account. Also, the IRS has stated information technology believes a stock sold past one spouse at a loss and purchased inside the restricted time flow by the other spouse is a wash sale. Check with your tax advisor regarding your personal situation.
How to avoid a launder sale
One manner to avoid a wash sale on an individual stock, while nonetheless maintaining your exposure to the manufacture of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry.
ETFs can be particularly helpful in avoiding the launder-sale rule when selling a stock at a loss. Unlike the ETFs that focus on broad-marketplace indexes, similar the South&P 500, some ETFs focus on a detail industry, sector, or other narrow group of stocks. These ETFs can provide a handy way to regain exposure to the industry or sector of a stock you sold, only they by and large concord enough securities that they pass the test of being not substantially identical to any private stock.
Swapping an ETF for another ETF, or a mutual fund for a mutual fund, or even an ETF for a mutual fund, tin can be a bit more than tricky due to the essentially identical security rule. There are no articulate guidelines on what constitutes a substantially identical security. The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may finish up paying more than taxes for the year than y'all anticipated. So when in dubiousness, consult with a tax professional person.
What is the launder-auction penalisation?
If the IRS determines that your transaction was a wash sale, what happens?
You tin't utilise the loss on the sale to offset gains or reduce taxable income. But, your loss is added to the toll basis of the new investment. The holding period of the investment y'all sold is too added to the holding period of the new investment. In the long run, there may be an upside to a higher cost basis—y'all may exist able to realize a bigger loss when you lot sell your new investment or, if it goes up and you sell, you may owe less on the gain. The longer belongings catamenia may assistance you qualify for the long-term capital gains tax charge per unit rather than the higher short-term rate.
That can be the silver lining—just in the short term you won't be able to use the loss to outset a realized gain or reduce your taxable income. Getting a letter from the IRS saying a loss is disallowed is never good so it's all-time to err on the side of caution. If you're concerned nearly a buying a potential replacement investment, consider waiting until thirty days have passed since the sale appointment. Or work with a financial professional who should exist able to confidently navigate the ins and outs of taxes and your investments.
For more than information, see IRS publication 550.
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Source: https://www.fidelity.com/learning-center/personal-finance/wash-sales-rules-tax
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