Can anybody point me towards a succint explanation of the WASH SALE rule? This is my first year with a good profit and my first year worrying about this crap. I am using Tradelog for my IB and Tradestation accounts. I found this link: http://www.armencomp.com/tradelog/wash_sales_avoid.shtml My confusion is that in the Tradelog report (Gains & Losses), I see a bunch of wash sales listed over the past year (e.g. QQQQ in July 2005). It's December now and I don't have any position in those stocks. Can I buy them back in January if I don't trade them in December? What if I do trade them in December and have a net loss in that stock for the year? What a pain in the rear. Is it time to go Mark to Market?
Wash Sale... If you sell at a loss and buy the same security back within 30 days, you can't claim the loss but rather get to include the loss in your cost basis on the subsequent buy. It's a pain in the neck. It has no overall tax consequence except perhaps shifting taxes payable from one year to the next. It really should be repealed.
If you do not trade them in all of December 2005 and you do not hold positions in them in any of December, then buying them back in January 2006 would not create a wash sale since you went 30+ days without being in those stocks.
It has significant tax ramifications, that's the reason for it. Congress did not want filthy rich folk to wipe out their tax bill by merely shuffling some stocks around with no real economic substance. In the old days we'd tell someone with a huge gain to take $XXX of some of the old family holdings that happen to have paper losses at the moment and sell them and immediately buy them back. So for the cost of commissions they'd wipe out their entire year's tax bill on their gains. Congress got wise to this manuver and they made the taxpayer stay out for 30 days. Then we got even smarter and had the taxpayer's spouse, child, corporation, retirement plan or other related party buy it back for him... Eventually the IRS outlawed that trick too.
1. Yes. 2. You can write off up to $3000 (of total gains and losses from all securities and other investment assets, if any) against ordinary income and carry forward the balance indefinitely. (Unless the losses are in a corporate account. In that case you can carry forward only 5 years. I don't believe you can write off investment losses against corporate ordinary income, however.)
I re-read it again, but don't see what you're getting at. Maybe I'm just having a problem proof-reading my own sentences. What looks like the contradiction?
"... In the old days we'd tell someone with a huge gain to take $XXX of some of the old family holdings that happen to have paper losses at the moment and sell them and immediately buy them back. So for the cost of commissions they'd wipe out their entire year's tax bill on their gains..." You claimed this action has "significant tax ramifications". I say it has none other than to shift taxes from one year to the next. If client had big gains this year and long term losers, he's entitled to close both out and wipe out his tax liability. But in so doing, he's given up his cost basis on the losing stock and would now have to pay taxes on "making up his lost ground" rather than recovering his losses without tax consequences. The net tax effect is zero... taxes shifted from one year to the next is all. Besides, to avoid the Wash Sale, all one has to do is not buy IT back for 30 days. Client can, however, buy something "similar" and be in approximately the same risk profile as before. And another point. If someone has a big long term loser to use in this ploy, why would client want to buy back the same loser immediately? He's been wrong all along for holding it, why buy it back? The entire concept of the Wash Sale is stupid, wasteful accounting BS .
Of course you're entitled to your opinion, but even if this was the sole effect (it is not), Congress feels even a one year deferral is significant nonetheless. Only if the taxpayer happens to have gains the following year by disposing of the stock used to create the capital loss. And again even if this was the only possible situation (it's not) Congress still sees it as significant, probably due to outcry from the public at large, who complain whenever they perceive the rich paying too little taxes. This is the compromise. It was felt that by enforcing a 30 day rule that the taxpayer would be have a real economic risk, and not merely shuffling paper per some tax advisor's suggestion to defer or even eliminate taxes. I wont say why the position might be a good or bad investment, I'm not a financial advisor But if it's not bought back, as you suggest, then there's nothing to worry about, since after 30 days Congress/IRS couldn't care less any longer! Actually it's tax BS not accounting BS
1. In this example, client was entitled to offset his winner with his long term loser no matter what. There is no unfair nor manipulative tax advantage gained. The only issue is buying back the same stock within 30 days. 2. I'll agree with our comment about "tax BS, not accounting BS"... I meant it was BS to have to bother accounting for it at all when it has zero overall tax and wealth impact. Growing net worth is accounted for by multiplication. The order of the multipliers does not affect the total. Whether taxes are paid in one year or the next has no impact on net worth... and therefore no impact on overall taxes. I don't mean to be especially argumentative, but the rest of your comments sound like politico speak... jibberish to defend an emotional concept... and without logic.