Selling Losing Stocks and the IRS Wash Rule
I got a great reader question in my email inbox yesterday:
If I buy a stock for $30 and it later drops to $20 - can I buy more of the stock at $20 and sell the $30 stock and claim a loss? Is there a waiting period …or is this a “wash”?
With the current stock market climate, I daresay that there are plenty of people wondering just the same thing. It is important to understand the IRS “wash rule” in order to avoid the hefty penalties that can come with selling a stock and then buying more of it within 30 days.
IRS wash rule
The IRS wash rule states that you cannot sell a stock just so that you can take a tax loss. Indeed, if you want to sell a stock, you cannot buy or sell that same stock anytime within 30 days (that’s before or after) of the sale. If you want to buy or sell that same stock, you have to wait until the 31st day. It’s not illegal to engage in a wash sale, but you can’t get any tax benefit from it.
Making a plan for selling losing stocks
Before you sell losing stocks, it is important to have a plan. Consider the reasons why you are selling the stock, and plan ahead. This way, you can have a reasonably sound investment strategy while still getting the tax benefit of selling losing stocks. Here are some suggestions for creating an investment strategy around selling losing stocks:
- If you think the stock will be worth purchasing at the lower price, plan to buy it again in 31 days.
- Hedge against a possible rally. What happens if the stock rallies while you are waiting? Well, think of the stock of a competing competing company in the same sector. In many cases, companies in the same sector will rally together. This way you can still realize gains if the stock market turns around.
It is also worth noting that you can consider other investments. Perhaps you want to move on to something else.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
Tags: stock market, IRS wash rule, investing blog, investment strategy,
wash sale, investments, selling losing stocks
