Wash-Sale Rules | Avoid this tax pitfall | Fidelity (2024)

FAQs

Wash-Sale Rules | Avoid this tax pitfall | Fidelity? ›

The wash-sale rule keeps investors from selling at a loss, buying the same (or "substantially identical") investment back within a 61-day window, and claiming the tax benefit.

There are strategies for avoiding wash sales while still taking advantage of taxable gains and losses. If you own an individual stock that experienced a loss, you can avoid a wash sale by making an additional purchase of the stock and then waiting 31 days to sell those shares that have a loss.

To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index^® (RUI). That would preserve your tax break and keep you in the market with about the same asset allocation.

While not illegal, wash sales have negative tax implications: losses from such sales cannot be used to offset gains in the same tax year. However, these losses can be added to the cost basis of the newly purchased security, affecting future gains.

You can't sell a stock or mutual fund at a loss and then buy it again it within 30 days just to claim the losses. You'll need to figure the basis for shares sold in a wash sale. When you do, add the amount of disallowed loss to the basis of the shares that caused the wash sale. These are the new shares you received.

IRS regulations require brokerages to mark a trade as a wash sale if, in the 60-day period around the sale, the investor buys, in the exact same account, the exact same security (with the same ID, called a CUSIP number).

The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated. So when in doubt, consult with a tax professional.

Under the wash-sale rule, you cannot deduct a loss if you have both a gain and a loss in the same security within a 61-day period. (That's calendar days, not trading days, so weekends and holidays count.) However, you can add the disallowed loss to the basis of your security. Here's an example to illustrate.

Keep in mind that the wash sale rule goes into effect 30 days before and after the sale, so you have a 61-day window to avoid buying the same stock. Alternatively, if waiting 61 days isn't feasible, you can purchase a security that is not substantially identical to the one you recently sold.

The tax benefit of your capital loss isn't gone forever, but it's deferred. The loss on the original investment will be taken into account when you sell your replacement shares by applying the losses to your adjusted cost basis.

Can you undo a wash sale? ›

You can either buy something else that is not substantially identical or wait beyond the 30-day window to repurchase the shares. (You still have a wash-sale on the original sale and repurchase. You realize the loss on the subsequent sale.)

Because your $800 loss is disallowed due to a wash sale, the disallowed loss is then added to the price of your new shares to determine your cost basis for the new shares. In short: $400 + $800 = $1,200. A higher cost-basis may wind up saving you on taxes later. If you make a profit, the taxable gain will be smaller.

Interactive Brokers includes wash sales on daily, monthly and annual Activity Statements for all 1099-eligible accounts, as required by the IRS.

The Wash-Sale period is defined as 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).

The wash sale rule prohibits taxpayers from claiming a loss on the sale or other disposition of a stock or securities if, within the 61-day period that begins 30 days before the sale (generally, the trade date) or other disposition, they: Acquire the same or “substantially identical” stock or securities; or.

The answer is D) not recognized at time of sale and added to basis of the newly acquired stock.

Be aware of the wash sale rule enforced by the IRS. The wash sale rule is important for investors reassessing their market positions and looking to sell and repurchase declining stocks to offset losses.

Add all the proceeds and enter the same amount as the cost basis, keeping your sheet (and mailing to IRS) for the breakdown. This would be only for wash sales that remain open as of January 1, 2021. You won't see the disallowed amount in your tax return, only on your backup detail list or statement.

If the wash sale was reported in box 1g, enter it there and the 8949 will be adjusted for the disallowed loss. If the non-deductible loss was not reported on box 1g, you can select code W in the adjustments section for the first Form 8949 adjustment code, and enter the adjustment amount.