Capital Loss and Wash Sale Rule

22 Jan 2008 by Chetan Shah.

If you own a stock which is currently making a loss but you think you want to hold for the long term then claiming capital loss might be helpful to you. Agree it is kind of late to be reminding people about this after 12/31 cut over but hopefully it will be helpful when you are ready to file your 2008 tax return.

Basically, what it means is that you can claim your stock losses as capital loss (by filing Schedule D along with you tax return) and claim as a deduction on your income tax. This will enable you to lower the amount of tax you have to pay to the IRS. However, IRS only allows 3000 dollars as the total capital loss you can claim for a year, you can certainly carry it over to next year’s tax return if you have stock losses exceeding 3000 dollars.

The thing to watch out for is the Wash Sale Rule. The idea of wash sale rule is to disallow a loss deduction when you immediately buy the same (or similar) stock from the market. IRS does not want you to sell the stock to claim the capital loss and immediately buy the stock back. If you buy the stock in less than 30 days after you sell the stock, you cannot claim capital loss deduction on your income tax return.

To be precise

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

* Buy substantially identical stock or securities,
* Acquire substantially identical stock or securities in a fully taxable trade, or
* Acquire a contract or option to buy substantially identical stock or securities.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

Same or Similar stock confuses me, I have read examples stating that if you sell Home Depot to claim capital loss today, you cannot buy Lowe’s tomorrow. This will trigger the “Substantially identical” stock part of the Wash Sale Rule. So to be on safe side, I never buy the stock for 30 days after I initiate my sell transaction.

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