No I Don’t Mean A Car Wash
A wash sale describes a situation where an investor sells a security, such as a stock or a bond, at a loss and then repurchases the same or substantially identical security shortly thereafter. This practice is subject to specific regulations in many countries, including the United States, to prevent investors from taking advantage of tax loopholes or manipulating their capital gains and losses.
Here's how a wash sale typically works:
- Sell at a Loss: The first step is when an investor sells a security at a loss. This means that the proceeds from selling the security are lower than the original purchase price or adjusted cost basis of that security. The loss can be realized when the investor decides to sell the security due to various reasons, including market fluctuations or a need to rebalance their portfolio.
- Repurchase within the Wash Sale Period: To trigger a wash sale, the investor must repurchase the same or a substantially identical security within a specific period before or after the sale. In the United States, the wash sale period includes 30 days before and 30 days after the sale date.
- Deferred Loss: The wash sale rule disallows the immediate recognition of the loss for tax purposes. Instead of claiming the loss on the original sale, the investor must add the disallowed loss to the cost basis of the repurchased security. This effectively defers the loss for tax purposes until the investor sells the repurchased security without triggering another wash sale within the required period.
Here's an example to illustrate a wash sale:
- Suppose an investor buys 100 shares of Company A at $50 per share, investing $5,000.
- The price of Company A's shares subsequently drops, and the investor decides to sell the 100 shares at $40 per share, resulting in a loss of $10 per share, or a total loss of $1,000.
- Within the wash sale period (30 days before or after the sale), the investor buys 100 shares of Company A again at $45 per share, spending $4,500.
- In this case, the wash sale rule will come into play. The investor cannot immediately claim the $1,000 loss on the original sale. Instead, the loss will be added to the cost basis of the repurchased shares. So, the cost basis of the new 100 shares becomes $4,500 + $1,000 = $5,500.
As a result, the investor's deferred loss of $1,000 will only be realized when they sell the repurchased shares without triggering another wash sale within the required period.
It's essential to be aware of the wash sale rule, as attempting to take advantage of it can lead to unintended tax consequences and violations of securities regulations. If you have questions or concerns about wash sales or tax implications related to your investments, it's advisable to consult with a tax advisor or financial professional.
If you would like to know more please visit http://www.afinwealth.com or contact:
AFIN Family Wealth Management
One Northfield Plaza, Suite 521, Northfield, IL 60093
Securities and insurance products are provided by Cetera Investment Services LLC, member FINRA/SIPC. Advisory services are offered through Cetera Investment Advisers LLC. Advisory services are only offered by Investment Advisor Representatives. Cetera is under separate ownership from any other named entity. For a comprehensive review of your personal situation, always consult with a tax or legal Advisor. Neither Cetera Investment Services, nor any of its representatives may give legal or tax advice. Examples are for illustrative purposes only and the return is not indicative of any actual investment. Actual investment results may differ substantially