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If you sell stock, you’ll receive a 1099-B tax form reporting that transaction. You might notice some of the losses are disallowed, due to the wash sale rule…
What are Wash Sales?
The IRS has a “wash sale” rule that prevents taxpayers from taking a capital loss on a security sold at a loss, when that same security is then repurchased within 30 days of the original sale. There are some added possible wash sale scenarios that can get more complicated, but the above is the most common you’ll want to understand.
The purpose of this regulation is to avoid investors creating investment losses for tax benefits while ultimately maintaining their same position in a security.
Is the Loss Lost?
While the Wash Sale rule disallows losses from being taken in these scenarios, all is not lost. The amount of the loss generated from a wash sale is added to the cost of the purchase that triggered the rule. Then when the security is disposed of at a later date, that loss is taken at that time, essentially making the original loss deferred.
For example, let’s say you purchase 10 shares of StockA on January 20th for $1,500. If you then sell that same stock lot on January 25th for $1,000, you’d have a capital loss of $500. But if you then purchase 10 shares of StockA again on January 30th for $1,100 the original loss of $500 would be disallowed, since you repurchased the same position within 30 days. Instead, that loss would be added to the cost of your January 30th purchase, adjusting your basis for when you eventually sell those shares. So your basis in the 10 shares is now $1,600, effectively adding the $500 original sale loss to the $1,100 new purchase. So if you later sell this share lot for $2,000, you’d have a net gain on all transactions at this time of $400.
Is Crypto Subject to the Wash Sale Rule?
At this time, cryptocurrency transactions are not included in the IRS wash sale regulation. That’s because cryptocurrencies are considered to be property, rather than securities. So all losses on crypto transactions can be realized and used to offset other gains, regardless of the holding period and repurchase dates.
It’s important to understand these rules as it pertains to wash sales since it can affect your loss harvesting strategy.
Reach out any time should you have questions…we’re happy to help!