Are you thinking about selling stock shares at a loss to offset gains that you have realized during 2020? If so, it is important not to run afoul of the ‘wash sale’ rule.
IRS May Disallow the Loss
Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent ‘buying the stock back’ before it is even sold. (If you participate in any dividend reinvestment plans, it is possible the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you have separately sold some of the same stock at a loss within the 30-day period).
The rule even applies if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth Individual Retirement Account.
Although the loss cannot be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of in the future (other than in a wash sale).
For instance, you bought 500 shares of ABC Inc. for $10,000 and sold them on November 5 for $3,000. On November 30, you buy 500 shares of ABC again for $3,200. Since the shares were ‘bought back’ within 30 days of the sale, the wash sale rule applies. Therefore, you cannot claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.
If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you had only bought back 300 of the 500 shares (60 percent), you would be able to claim 40 percent of the loss on the sale ($2,800). The remaining $4,200 loss that is disallowed under the wash sale rule would be added to your cost of the 300 shares.
If you have cashed in some big gains in 2020, you may be looking for unrealized losses in your portfolio so you can sell those investments before year end. By doing so, you can offset your gains with your losses and reduce your 2020 tax liability, but be careful of the wash sale rule. We can answer any questions you may have.