Wash Sale Rules
By Gregory J. Cook, EA, CPA,
Accredited Tax Advisor
When you sell a stock at a loss and repurchase a
substantially identical stock within 30 days, your transaction will likely be
designated a wash sale. A taxpayer cannot deduct losses incurred from wash
sales, however, gains from such sales are taxable.
A wash sale results when a taxpayer sells stock or securities at a loss and
within 30 days before or after the sale, buys, in a fully taxable trade,
substantially identical stock or securities. This rule also applies if you sell
the stock and your spouse, or a corporation you control, buys the substantially
identical stock. Under the wash sale rules, the term “stock or securities”
includes contracts or options to acquire or sell stocks or securities.
One of the requirements of a wash sale is that the stock or securities purchased
must be substantially identical to the stock or securities sold. Generally,
stock or securities of one corporation are not considered substantially
identical to stock or securities of another corporation. They may, however, be
considered substantially identical in a reorganization where the stock and
securities of the predecessor and successor corporations are substantially
identical. Generally, preferred stock of a corporation is not considered
substantially identical to the common stock of the same corporation, unless the
preferred stock is convertible.
Where the wash sale rules apply, adjustments are made to the holding period and
the basis of the property acquired in the transaction that triggered the rule.
Generally, the holding period of the security disposed of is tacked onto that of
the replacement security. Where a security or share of stock is bought, and such
purchase triggers the wash sale rule, the basis of the property acquired (new
property) is the acquisition price plus the loss disallowed on the substantially
identical securities.
If the number of shares of substantially identical stock or securities you
bought within the 30 day period is less than the number of shares of stock or
securities you sold, you must determine the particular shares of stock or
securities to which the wash sale rules apply. This is done by matching the
shares of stock or other securities sold with an equal number of the identical
shares or securities bought. The shares should be matched in the same order in
which they were acquired. The matched shares and securities are subject to the
wash sale rules.
Please note however, that you should consult your Cook & Co. advisor
before performing such a transaction.
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