Information technology'south not uncommon for investors who own stocks or securities that take lost value to sell them in social club to take advantage of the losses for tax reasons. It's not a bad idea, peculiarly if it's a stock you want to sell anyway; you can use the loss to showtime capital gains or fifty-fifty, to some extent, kickoff your taxable income from other sources, such every bit regular earnings.

But what if it'due south a stock you nevertheless like, and you don't really want to sell? Tin't you just sell it, harvest the loss, and so buy it dorsum immediately? In a word, no. This is precisely what the wash-auction rule exists to prevent: harvesting revenue enhancement-loss benefits on an investment yous don't intend to exit.

What is a launder sale?

Under the launder-sale rules, a wash auction happens when you sell a stock or security for a loss and either buy it dorsum within 30 days later on the loss-auction date or "pre-rebuy" shares within 30 days beforeselling your longer-held shares.

In either case, the loss is non considered realized for revenue enhancement purposes, with the auction and subsequent (or prior) purchase "washing" one another out. This rule is designed to prevent people from selling stock to just to claim the revenue enhancement do good, without intending to exit the investment.

Once more, the rule applies to a thirty-day menstruation earlier and afterward the sale engagement to forbid your buying the stock "back" earlier it'south even sold.

Wash-sale rule examples

Let's say you ain 100 shares of XYZ Corp with a toll basis (what y'all paid for them) of $10,000, and you sell them on June i for $iii,000. That works out to a $seven,000 loss, and if you own the shares in a taxable brokerage business relationship, you can claim that loss when you file your taxes.

Notwithstanding, if y'all were to rebuy shares anytime between June 2 and July 1, so the sale is considered a wash sale, and the loss doesn't authorize every bit a taxable loss. It works the same way if y'all buy shares within thirty days before your sale likewise; in this instance, if y'all bought shares equal to what you sold on June 1 anytime on or after May two, then it would "wash out" your taxable loss.

What happens if you buy fewer shares?

A central point nigh wash sales is that they piece of work out at 1:ane for each share you repurchase. Using the case higher up, if you repurchased l shares in that 30-before-to-thirty-afterwards period, information technology would wash out 50 shares of the taxable loss.

Launder-auction rules

Hither is how the Internal Revenue Service defines a wash auction, directly from IRS Publication 550:

A wash sale occurs when you sell or trade stock or securities at a loss and within thirty days earlier or after the sale you:

  1. Buy substantially identical stock or securities,

  2. Acquire essentially identical stock or securities in a fully taxable trade,

  3. Acquire a contract or selection to buy substantially identical stock or securities, or

  4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

Allow's summarize: A wash sale isn't solely near purchasing stocks; information technology can also involve acquiring options to buy stock. Moreover, the rule besides counts if you buy identical shares in a different account, including a traditional or Roth IRA. In other words, you lot tin't harvest a tax loss in your taxable business relationship if yous purchase shares within the window that creates a launder auction, even in a different account (including retirement accounts).

I final note: Launder-sale provisions work on shares that you sell for a loss, merely there are no respective wash-sale rules for stock that you lot sell at a gain. That is, if you lot sell stock for a proceeds and buy information technology correct back, you must still report the entire proceeds.

How do yous avoid a wash sale?

The kickoff, most obvious affair to do is to avoid ownership shares in the aforementioned stock within 30 days beforeor thirty dayslater onselling. If you do, yous lose the power to harvest a tax loss on the number of shares you purchase.

Even so, if you inadvertently create a wash sale by rebuying also presently, your potential taxable loss doesn't just go upward in smoke: The "lost" taxation basis carries over to the replacement buy. Merely sell again, andfollow the launder-sale rules this time. You'll finally be able to harvest that taxation loss.