The Wash Sale Rule
How Investors Can Keep Clean and Avoid the Mess
In a previous post, I reflected on some of the key differences between traders and investors. Investors are in it for the long-term, holding investments for years or decades. In contrast, traders take advantage of short-term market moves to buy and sell stock (or another financial vehicle), hopefully at a profit.
Another big difference: traders can trigger wash sales on a regular basis. Investors rarely do, but if you aren’t careful, you can run afoul of the IRS rules on wash sales.
If you sell a stock at a loss, then repurchase that stock (or something very similar) within thirty days, you’ve triggered a wash sale.
With a wash sale, you can’t count the loss on the first sale. Instead, you add that loss to the basis of the second thing that you bought. By readjusting the basis, you effectively get that “loss” back when you get around to selling the second thing.
1. Let’s say you bought a stock for $25, then sell it for $10. That’s a $15 loss.
2. Two weeks later you buy it back at $5. If this wasn’t a wash sale your basis in the second trade would be the amount you paid, or $5. Because we’re readjusting your basis, the second thing now has a basis of $20 ($5 + $15).
