Are you eyeing your portfolio with year-end investment loss harvesting in mind? Before you place those sell orders, take a moment to review the “wash sale” rules.
A wash sale occurs when you sell a stock, bond, or mutual fund and buy the same or a substantially identical security within 30 days before or after the sale. When this happens, you’re barred from deducting a tax loss on the sale. Instead, your cost basis of the new security is increased by the loss.
Example. Say you sell 100 shares of XYZ mutual fund at a loss of $3 per share. A week later, you regret your decision and buy another 100 shares of XYZ fund. Your original loss of $300 will be disallowed, and you’ll add the $300 to your cost basis in the new shares.
Be aware of a possible trap if you use an automatic purchase plan or dividend reinvestment plan. If these plans cause you to acquire more shares of a stock or fund within 30 days of a sale, the wash sale rules will apply to your sale.
How can you avoid a wash sale?
You can avoid a wash sale if you make your purchase more than 30 days before or after the sale date. Also, you can buy shares in a different but similar stock or mutual fund without triggering a wash sale.
If you have questions about the wash sale rules, please call us.