The shares are going up. The shares are going down. While they have mostly risen so far this year, bull markets don’t last forever. And the price of a particular stock can fluctuate across the lot regardless of the overall trend line.
When you make what turns out to be an ill-fated stock investment in a taxable brokerage firm account, the upside is that you can claim a capital loss tax deduction (within certain limits) when you sell. Law? Not necessarily. In fact, the dreaded rule of selling linen can negate your tax savings.
Here’s the story of how the Wash Sell Rule works, including whether it applies to cryptocurrency losses.
How the IRS “Wash Sale” Rule Works
A loss resulting from the sale of shares or mutual fund shares is not permitted for federal income tax purposes if, during the 61-day period beginning 30 days before the date of selling at a loss and ending 30 days after that date, you buy essentially identical securities. The theory is that selling at a loss and offsetting the offsetting purchase of substantially identical securities during the 61-day period amounts to economic “clean-up”. Therefore, you are not entitled to any deduction for loss and the tax savings that would normally result from selling at a loss are not allowed.
When you have an unauthorized wash sale loss, the loss doesn’t just evaporate (except when your IRA or controlled corporation acquires the essentially identical securities, as explained later). Instead, the general rule is that the disallowed loss is added to the tax base of the essentially identical securities that triggered the indirect sale rule. Then, when you finally sell those essentially identical securities, the additional base reduces your tax gain or increases your tax loss. This is because the denied loss becomes a deferred loss which is taken into account when you sell substantially identical securities.
Example: You purchased 1,000 Beta Bank shares on 07/21/21 for $ 20,000 using your taxable brokerage firm account. Stocks collapse. As a tax-savvy person (or that’s what you thought), you recoup a capital loss of $ 8,000 by bailing out the shares on 12/15/21 for $ 12,000 (base $ 20,000 – proceeds of sale of $ 12,000 = loss of $ 8,000). You intend to use this loss to shelter an equal amount of 2021 capital gains. After you accumulate the loss in tax savings (or that’s what you thought), you buy back then 1,000 beta shares on 12/19/21 for $ 12,200, because you still love the action. Unfortunately, the linen sale rule prohibits your expected capital loss deduction of $ 8,000. The denied loss increases the tax base of the substantially identical securities – the beta shares you acquire on 12/21/21 – to $ 20,200 (cost of $ 12,200 + loss of refused wash sale of $ 8,000).
Two strategies to overcome the rule of the sale of linen
Avoiding the no-effect sell rule is only a problem when you want to sell a stock or security to realize a tax-saving capital loss, but still want to own the stock or the stock because you think it will appreciate against the current price.
One way to beat the rule of wash sales is to use the “doubling” strategy. You buy the same number of stocks that you want to sell at a loss. Then you wait 31 days to sell the original batch of shares. Ultimately, you made your sale at a tax loss, but you still own the same number of shares as before and can therefore still benefit from the expected capital gain.
Example: You want to sell the 1,000 Zeta shares you currently own for a tax loss in 2021. But you don’t want to give up the stock. So on 11/21 you buy an additional 1,000 Zeta shares. Then you can sell the initial lot of 1,000 shares for your tax loss anytime between 12/22 and 12/31. The wash sell rule is avoided because 12/22 is more than 30 days after 12/21. 11.
There may be a much cheaper way to achieve essentially the same goal. Try to buy a cheap call option on the stock you want to sell for a tax loss in 2021. Then wait more than 30 days to sell the stock.
Example: You currently own 1,000 Yazoo shares that you want to sell before the end of the year to reap a tax-advantaged 2021 capital loss. But you don’t want to give up the stock. It might cost as little as $ 100 to buy a January 2022 call option for 1,000 Yazoo shares, while buying 1,000 real shares could cost $ 10,000 or more. Suppose you buy a call option for 1,000 shares on 11/21. You can sell your 1,000 Yazoo shares that you currently own anytime between December 22 and December 31 and claim a tax-saving capital loss on your 2021 return because you were successful in avoiding the tax. blank sale rule. Make sure to wait at least 31 days before selling Yazoo shares, as the call option and the stock are considered to be substantially identical securities for the purposes of the no-effect sell rule.
Deadline alert: To use any of these strategies, you need to take action on or before 11/30/21 to have enough time to sell at a loss in 2021 without triggering the wash sell rule.
IRS Says Blank Selling Rule Applies When Your IRA Acquires Substantially Identical Securities
Suppose you use your traditional IRA or Roth IRA to buy substantially identical securities within 30 days before or after a loss in your taxable brokerage account. Does this trigger the wash sale rule? According to the IRS (in Revenue Ruling 2008-5), using the IRA to purchase substantially identical securities does indeed trigger the no-effect sell rule. Worse yet, the IRS says you cannot increase your IRA’s tax base by the denied loss. The disallowed loss simply goes up in smoke.
Suppose you sell stocks at a loss and your spouse buys identical stocks within the prohibited 61-day period? The wash sale rule would clearly apply if you are producing jointly. IRS Publication 550 states that the wash sale rule applies even if you and your spouse file separate returns.
According to IRS Publication 550, the blank sale rule also applies when substantially identical securities are purchased by a company you control.
Cryptocurrency losses are apparently exempt from the wash sell rule (for now)
Since the IRS classifies cryptocurrencies as “property” rather than securities, the wash-sell rule apparently does not apply if you sell cryptocurrency at a loss and acquire the currency. same cryptocurrency shortly before or after selling at a loss. You only have a short or long term reduction in garden varieties depending on your holding period. No worries about the wash sale rule. This favorable federal tax treatment is consistent with the long-standing treatment of foreign exchange losses, established by IRS Revenue Ruling 74-218. This is a good thing, as some people are actively trading cryptocurrencies and the prices can be volatile. Losses are not unusual and you want to be able to legitimately claim all losses for tax saving results.
Example: You bought a cryptocurrency at a high level and sold it low for a loss of $ 35,000. During the year, you also recorded large stock market gains in your taxable brokerage firm account. You can offset a portion of your stock gains with the loss of $ 35,000 from the unfortunate cryptocurrency investment, even if you redeem the same cryptocurrency soon after the sell at a loss. Reason: Cryptocurrency losses are exempt from the wash sell rule. At least for now.
However, losses of crypto-related securities, such as Coinbase Global Inc.’s COIN stock,
may fall under the indirect sale rule, as the rule applies to losses of assets classified as securities for federal income tax purposes. For now, cryptocurrencies themselves are not classified as securities.
The bottom line
As the end of the year approaches, harvesting tax losses becomes a popular pastime. But watch out for the wash sale rule if you want to reap the expected tax savings.