Wash Sale Rule

Stock Market Analysis

Last updated on October 19th, 2020

It seems as though the stock market has been on a roller coaster ride for most of the year with all of its ups and downs. 

Did you sell stock for a gain during the year and are now looking to offset some of those gains during the fourth quarter?  If so, it’s important to be aware of the “wash sale” rule in order to prevent any unexpected year-end tax planning faux pas.

Under the wash sale rule, when stocks or securities are sold for a loss and substantially identical stocks or securities are repurchased within a 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. This rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with their stock ownership in any significant way. Participation in a dividend reinvestment plan can trigger this rule if stocks are sold within a 30-day period prior to the issuance and reinvestment of a dividend.

When the wash sale rule is triggered, the disallowed loss from the sale will increase the basis of the repurchased stock.  Therefore, the previously disallowed loss will be recognized when the new stock is ultimately disposed of (other than in a wash sale).

Example. Sam buys 500 shares of XYZ Corp. for $10,000 and sells them on June 5th for $3,000. On June 30, Sam buys 500 shares of XYZ Corp. again for $3,200. Since the stock was “bought back” within 30 days of the sale, the wash sale rule applies. Sam can’t claim a $7,000 loss for the June 5th sale. Instead, Sam’s basis in his “new” 500 shares is $10,200: the actual cost ($3,200) plus the $7,000 disallowed loss. Note that while losses resulting from a wash sale cannot be claimed, gains can’t be avoided. That is, if you sell stock for a gain and buy it right back, you must still report the gain – no special rule applies.