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Reduce Your Capital Gains Tax Bill: Wash Rule

Posted By Jim On 12/05/2007 @ 12:54 pm In Taxes | 16 Comments

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 [3] 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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