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Reduce Your Capital Gains Tax Bill: Wash Rule
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This morning, I wrote a post advocating that you donate your appreciated stock to a charity because it’s the only option I can think of where someone other than you also benefits. Well, here’s an option where you will benefit – sorta. The wash rule is based on the idea that your stock profits can be offset by your stock losses. It’s a principle that businesses use all the time and one that You Inc. should take advantage of. I’ve written about the wash rule in the past but I figure a refresher can’t be bad for both of us.
This year, we have some realized mutual fund gains that I’m looking to potentially wipe away with some mutual fund losses. Since the gains have been realized (I sold the stock), we’re already on the hook for them and there’s no way around it. (Unrealized gains are invisible, if it appreciates and you don’t sell it, then it doesn’t count) We also have some funds in which we have some unrealized losses so in order to offset them I’ll sell enough stock to balance out the gains and Uncle Sam will end up with nothing.
The only part of the wash rule that you need to pay careful attention to is that you don’t buy back into the stock you just sold for a loss within thirty one days. If you do, then the wash rule is nullified. So if you sell FiveCentNickel Inc. because it tanked this year to offset the tremendous gains of BFP Inc., you can’t buy back into FiveCentNickel for thirty one days. Now, in the case of mutual funds, you can always buy a similar mutual fund; so it’s really a non-issue. (incidentally, FCN is a great investment, you should buy back in as soon as you can!)
So, got a realized winner and some unrealized losers? Pit them in a deathmatch and you can come out a winner (tax-wise anyway).
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So what happens if you do buy FCN within 30 days and sell it later for profit..or loss?
How much is a share of FiveCentNickel going for nowadays? How many shares are outstanding?
If you buy it within 30 days, you can’t write off the loss.
I think FCN is a pink sheet nowadays.
Lazy: Every single share is outstanding. Fantastic. And superb.
Not to distract from the more fun talk, If we have no realized capital gains this year (due simply to holding long) can we also use the rule to sell of some of our down stock to offset earned income for the year? I was actually just looking into this possibility so your topic is timely.
Yes, you can deduct up to $3,000 of your capital losses from your income this year and carry the extra over (if you have any). It’s superficially covered in Tax Topic 409, I’ll expand on this tomorrow (thanks for the post idea!)
Great Jim, thanks for the response. As always, pleasure reading your work.
Actually, if you buy the stock back, the loss in the original sale is applied to the cost basis on the purchase the second time around so you end up claiming it after you sell the the second time.
Therefore it is “claimable”
If you take it a step further, when you sell a mutual fund for the purposes of realizing a loss or avoiding a capital gains distribution, think about buying back into a like minded ETF.
By doing so, you avoid triggering wash sale rules, don’t miss any time in the markets and you will most probably be moving into a more cost efficient investment.
iShares has a tool on their site that allows you to find an ETF that corresponds to the mutual fund you just sold.
CHM: I’ve never used the iShares tool but if it only suggests iShares ETFs, I would only use it as a guideline since there are many ETFs that aren’t iShares.
I have a question for the gurus on this board. I held GE since 91 and felt that it wasn’t performing so I came out with a wash when I sold today. I actually traded it for an oil stock and am hoping to get some gains. Now, will I be able to count this as a loss since I’ve held since 91 and NO profits when I sold it? Thanks to all in advance!
Jim, are you still alive? I never saw a response to Kari’s JUN 2008 question. I have a wash rule question: Is it legal to first buy shares (i.e. s&p fund) in a mutual fund company, then a day later sell same amount of shares in a like mutual fund (i.e.s&p fund) that you own, in order to take a loss but not lose your position in the market? Sort of a reverse sell/buy strategy? Thanks.
Kari: As long as you have proof of the purchase price, you can count it as a long term capital loss.
Mr. Jerry: I looked into that scenario and it turns out the rule applies for purchases 30 days before and after the sale of stock. So if you bought shares, you have to wait 30 days before you can sell and claim a loss.
Can someone out there tell me if you can buy the stock back within custodial or trust accounts without tripping the wash sale rule. That is, I sell WFC from my personal account and have my self-directed IRA or an educational trust established for my grand kids buy it back. Will I loose the tax deduction?
You will trigger the wash sale rule if you buy and sell, regardless of where, within the 31 day period.
This issue had been confusing me, thanks for the helpful article, Jim!