More and more people are trying
their hand at trading securities through online websites. If you are one of those people, the wash sale
rule is something you may want to be aware of.
A wash sale occurs when a taxpayer
sells a stock or security for a realized loss, and within 30 days before or
after the day of the sale (a 61-day period), the taxpayer purchases “substantially
identical” stocks or securities. For
example, let’s say I am a stockholder of a popular retail chain named
Small-Mart. Small-Mart has had a slow year and their stock is down, so I
decide to dump it. A few weeks later I
read they are acquiring a competitor named Jay-Mart. Jay-Mart is a large, well-managed competitor, so I think the future of the new consolidated company is bright and I decide
to look into adding the stock back into my portfolio. If I repurchase the stock within 30 days of
previously selling it at a loss, a wash sale has occurred.
When a wash sale occurs the loss on the
original sale is disallowed. Rather, the
amount of the would-be “loss” is added to the basis of the newly purchased
stock – essentially deferring it for future recognition. The acquisition date for the subsequent
purchase is adjusted back to the acquisition date of the original stock
purchase. It’s as if the sale and
repurchase of the stock never even occurred!
In order for the sale to be considered
a wash sale the stock or securities must be substantially the same, which
usually means from the same corporation.
Therefore selling off a stock of one computer manufacturer for a loss
and subsequently purchasing the stock of another computer manufacturer within
30 days does not result in a wash sale.
However, in cases such as acquisitions or
reorganizations (as in the example above) the stocks may be considered substantially identical,
depending on the facts and circumstances.
Usually bonds or preferred stock are not considered substantially
identical to the common stock of the same corporation – unless the bond or
preferred stock is convertible into common stock of that same corporation.
There are some exceptions to the
rule that you should be mindful of.
Specifically, stock or securities acquired as a result of a nontaxable
exchange, like-kind exchange, inheritance, or divorce settlement do not fall
under wash sale rules.
Brad Williamson
