It's not uncommon for investors who ain stocks or securities that have lost value to sell them in society to have advantage of the losses for tax reasons. Information technology's not a bad idea, especially if it'due south a stock you want to sell anyway; yous can use the loss to offset capital gains or even, to some extent, offset your taxable income from other sources, such equally regular earnings.

But what if it'due south a stock you still like, and you lot don't actually want to sell? Tin't you lot simply sell it, harvest the loss, and then purchase it back immediately? In a give-and-take, no. This is precisely what the launder-auction dominion exists to forestall: harvesting tax-loss benefits on an investment you don't intend to exit.

What is a launder auction?

Under the wash-sale rules, a wash auction happens when you sell a stock or security for a loss and either buy it back within xxx days after the loss-auction engagement or "pre-rebuy" shares inside 30 days beforeselling your longer-held shares.

In either instance, the loss is not considered realized for tax purposes, with the auction and subsequent (or prior) purchase "washing" one another out. This rule is designed to prevent people from selling stock to just to claim the tax benefit, without intending to get out the investment.

Again, the rule applies to a 30-24-hour interval menstruum before and later on the sale date to forestall your buying the stock "dorsum" before it's even sold.

Wash-auction rule examples

Let'south say you own 100 shares of XYZ Corp with a toll footing (what you paid for them) of $10,000, and yous sell them on June 1 for $iii,000. That works out to a $7,000 loss, and if y'all own the shares in a taxable brokerage account, you can claim that loss when yous file your taxes.

However, if you lot were to rebuy shares anytime between June 2 and July 1, then the sale is considered a wash auction, and the loss doesn't qualify as a taxable loss. It works the same style if you buy shares within thirty days earlier your sale every bit well; in this case, if you bought shares equal to what you sold on June i anytime on or after May 2, then it would "wash out" your taxable loss.

What happens if you buy fewer shares?

A key point near launder sales is that they work out at one:i for each share y'all repurchase. Using the example above, if you repurchased 50 shares in that 30-before-to-xxx-later menstruation, it would launder out 50 shares of the taxable loss.

Wash-sale rules

Here is how the Internal Revenue Service defines a wash sale, directly from IRS Publication 550:

A wash auction occurs when you sell or trade stock or securities at a loss and inside thirty days before or after the auction you:

  1. Buy substantially identical stock or securities,

  2. Acquire substantially identical stock or securities in a fully taxable trade,

  3. Larn a contract or option to buy substantially identical stock or securities, or

  4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

Let's summarize: A wash sale isn't solely about purchasing stocks; it can likewise involve acquiring options to buy stock. Moreover, the rule likewise counts if you buy identical shares in a different business relationship, including a traditional or Roth IRA. In other words, you can't harvest a tax loss in your taxable business relationship if you lot purchase shares within the window that creates a wash sale, even in a different account (including retirement accounts).

1 final note: Launder-auction provisions work on shares that you sell for a loss, only there are no corresponding launder-sale rules for stock that yous sell at a gain. That is, if you sell stock for a proceeds and purchase it correct dorsum, you lot must still report the unabridged gain.

How do you avoid a wash sale?

The first, most obvious thing to do is to avert buying shares in the same stock within 30 days beforeor xxx daysafterselling. If you practice, you lose the ability to harvest a tax loss on the number of shares yous buy.

Even so, if y'all inadvertently create a launder sale past rebuying too soon, your potential taxable loss doesn't only go up in smoke: The "lost" taxation footing carries over to the replacement purchase. Simply sell over again, andfollow the wash-sale rules this fourth dimension. Yous'll finally be able to harvest that taxation loss.