In my introduction to Capital Gains I talked briefly about carrying a Capital Loss forward and the Wash Sale. In this post I’ll go into more detail on this and how to leverage it for your portfolio.
You can find the full facts of the Wash Sale Rule from the IRS Publication 550 it is located in Chapter 4, and I recommend reading through it if you start trading for Capital Loss Harvesting, my take on it (remember that I am just giving my own interpretation here) is to look at it like this – the Wash Sale Changes How you Report and Claim Losses in that you have to some different filings to deal with the situation, and it will throw a spanner in the works for our investment strategies.
So, my plan is to steer clear of this rule so I don’t get the extra headache of filing and so I can plan my Capital Loss Harvesting correctly. The simple way to avoid the Wash Sale rule is to not buy or sell the same Stock or related derivative within 30 days (actually 61 days is the roundtrip time – IE the time between the first purchase, the sale and the repurchase). – I give it an extra couple of days to be safe in case that the transaction files slowly, so 35 days is my rule. Now, this only really triggers when you sell a loss and rebuy again and try to claim the loss. There are a few scenarios below to help explain better:
Claiming a Loss on a Regular Trade
On Jun 1st I buy 100 Apple shares for $600 for a cost of $60,000, the value of the stock drops to $500 and I sell on Jul 1st for a loss of $100 per share ($10K) If I don’t buy Apple again for 35 days then I can claim a loss at year end of $10K, offsetting other Capital Gains.
Activating a Wash Sale
On Jun 1st I buy 100 Apple shares for $600 for a cost of $60,000, the value of the stock drops to $500 and I sell on Jul 1st for a loss of $100 per share ($10K) If I rebuy on Jul 20th at a new price of $510 per share I activate the Wash Sale and I cannot claim the 10K Capital Loss!
Capital Loss Harvesting
On Jun 1st I buy 100 Apple shares for $600 for a cost of $60,000, the value of the stock drops to $500 and I sell on Jul 1st for a loss of $100 per share ($10K) If I rebuy Apple at $510 on Aug 6th or Later I can claim a 10K Capital Loss, whilst I have actually only lost 9K on the stock trade!
Final Thoughts on a Wash Sale and Capital Loss Harvesting
- Be aware that the Wash Sale will apply to both your Taxable and Non-Taxable Accounts, so you cannot sell in one Brokerage and buy in your IRA within the timelines mentioned without triggering the Wash.
- Capital Loss Harvesting is a great way to reduce your overall tax bill as you can apply $3000 per year against your regular income, but timing it can be hard, if you sell and cannot rebuy for a month you might well miss opportunities in the market, so pick your trades wisely.
- A wash sale should be considered a PITA, it isn’t the end of the world and what will happen is that you will average your basis on the multiple purchases, so if you trigger one don’t panic, but just try to avoid them.
- If you are not claiming the $3,000 per year against your regular income, you are leaving something on the table, try to find creative ways to craft this whilst staying within the Wash Sale Rules.
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