Wash-Sale Rules | Avoid this tax pitfall | Fidelity (2024)

FAQs

Wash-Sale Rules | Avoid this tax pitfall | Fidelity? ›

The wash-sale rule keeps investors from selling at a loss, buying the same (or "substantially identical") investment back within a 61-day window, and claiming the tax benefit.

If you have a wash sale, however, you cannot claim the write-off until you finally sell the asset and avoid repurchasing it for at least 30 days. After that period, you can re-buy the asset without triggering the wash-sale rules.

To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index^® (RUI). That would preserve your tax break and keep you in the market with about the same asset allocation.

You can't sell a stock or mutual fund at a loss and then buy it again it within 30 days just to claim the losses. You'll need to figure the basis for shares sold in a wash sale. When you do, add the amount of disallowed loss to the basis of the shares that caused the wash sale. These are the new shares you received.

The Bottom Line

To avoid triggering the wash sale rule, an investor can employ a strategy such as buying more of the stock that they'd like to sell, holding on to the new stock purchase for 31 days, and then selling it. An investor could also sell a stock at a loss, register the loss, and then buy a similar investment.

The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated. So when in doubt, consult with a tax professional.

Be aware of the wash sale rule enforced by the IRS. The wash sale rule is important for investors reassessing their market positions and looking to sell and repurchase declining stocks to offset losses.

Note: Wash sales are in scope only if reported on Form 1099-B or on a brokerage or mutual fund statement. Click here for an explanation. A wash sale is the sale of securities at a loss and the acquisition of same (substantially identical) securities within 30 days of sale date (before or after).

4. To avoid triggering the Wash Sale Rule, you can wait at least 31 days before repurchasing the same or a substantially similar option. Alternatively, you can purchase a different option with similar characteristics to the one you sold.

Per Revenue Ruling 2008-5, IRA transactions can also trigger the wash-sale rule. If shares are sold in a non-retirement account, and substantially identical shares are purchased in an IRA within 30 days, the investor cannot claim tax losses for the sale, nor is the basis in the individual's IRA increased.

How do day traders avoid wash sales? ›

The tax benefit of your capital loss isn't gone forever, but it's deferred. The loss on the original investment will be taken into account when you sell your replacement shares by applying the losses to your adjusted cost basis.

The Wash-Sale period is defined as 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

The wash sale rule prohibits taxpayers from claiming a loss on the sale or other disposition of a stock or securities if, within the 61-day period that begins 30 days before the sale (generally, the trade date) or other disposition, they: Acquire the same or “substantially identical” stock or securities; or.

Generally, the wash sale rule applies to traders the same way it applies to investors. The difference is that traders have a much harder time keeping records relating to wash sales because they engage in so many transactions. There is a way for traders to escape the wash sale rule altogether.

The answer is D) not recognized at time of sale and added to basis of the newly acquired stock.