You sold one of your stock investments at a profit, so now you’ll have to report a capital gain on this year’s income tax return. Since another stock you own has been losing ground lately, you’re thinking of selling it to claim a capital loss on your return to offset your gain.
However, because you believe the company will bounce back eventually, you’re reluctant to part with your stock. What would happen if you sold your stock to claim the loss and then bought it back again right away?
At first glance, it might appear to be the perfect plan. But it won’t work because of the tax law’s wash-sale rules. These rules prevent you from claiming a capital loss on a securities sale if you buy “substantially identical” securities within 30 days before or after the sale. If you want to claim the loss, you’ll have to wait more than 30 days to repurchase stock in the company.
Gone for Good?
Wondering what happens to wash-sale losses you can’t deduct? They don’t just disappear from your tax calculations. Instead, you’re allowed to add the losses to the cost basis of the shares you reacquire. This increase in cost basis will mean a smaller capital gain (or a larger loss) when you eventually sell your shares.
Keep track of any share purchases you make through a stock dividend reinvestment plan or by having mutual fund distributions automatically reinvested. Selling shares of the same stock or mutual fund at a loss within 30 days of the automatic purchase (before or after) will trigger the wash-sale rules, and part of your loss will be disallowed.
Is There a Plan B?
Is there any way you can take your tax loss and still maintain your position in the stock? You may be able to double up on the loss securities, then wait 30 days and sell your original securities at a loss.
Be sure to consult your tax professional before taking this, or any, action.
If you have any questions about how to navigate these issues, contact me, Crystal Wampler, or Amit Chandel, CPA, CTS, CTP, CTC, CVA, CTRS, CExP, CGMA, LLM (tax), Author, here or by phone at 562-281-1040. We are always available to answer any questions you may have.