What is the Wash-Sale Rule?

The Wash-Sale Rule is a regulation set by the IRS advising taxpayers about selling securities at a loss for tax benefit purposes. 

 A wash sale occurs when a taxpayer sells or trades a security at a loss and within 30 days before or after the sale:

1. Buys substantially identical stock or securities
2. Acquires substantially identical securities in a fully taxable trade
3. Acquires an option contract to buy a substantially identical securities

If you have a wash sale on a security, it will disallow the loss and be added to the cost-basis of the repurchased security. Here is an example of how this may work: 

Let’s say you purchase 100 shares of XYZ at $20/share, a total investment of $2000. On June 30th, the stock falls to $18/share, and you decide to sell all 100 shares you own. This would result in a capital loss of $200 on your account. 

Now, if XYZ falls to a price of $16/share and you decide to purchase 100 shares back at that price, on July 15th (within 30 calendar days) this would trigger the wash sale. The initial capital loss of $200 would be disallowed, and added to the cost basis on the second purchase of XYZ stock.

Your new cost basis on XYZ would increase from $16/share to $18/share. The $200 loss would be added to the total cost of the trade ($1600 + $200 loss = $1800 total cost / 100 shares owned = $18/share). 

If you need further clarification regarding the Wash-Sale rule, please contact one of our Investment Specialists at  855-525-7634.