Can I Sell and Buy the Same Stock?
Understand the financial and tax implications of selling and immediately repurchasing the same stock. Manage your investments effectively.
Investors sometimes sell and repurchase the same stock, often to realize a tax loss. However, the wash sale rule can significantly alter the intended tax outcome. Understanding this rule is important for frequent traders, as it dictates how certain losses are treated for income tax purposes. Ignoring it can lead to unexpected tax liabilities or disallowed losses.
The Wash Sale Rule Explained
A wash sale occurs when an investor sells a security at a loss and repurchases the same or a “substantially identical” security within a 61-day period. This period begins 30 days before the sale date and ends 30 days after, including the sale date. The IRS defines this rule to prevent taxpayers from claiming artificial losses while maintaining an investment position.
The concept of “substantially identical” includes not just the same shares, but also options, warrants, or convertible bonds tied to the same security. For example, selling common stock at a loss and then buying call options for that same company within the 61-day window is typically a wash sale. The IRS considers these transactions as maintaining an economic interest.
The rule applies regardless of where the repurchase occurs: the same account, a different account, or even by a spouse or controlled corporation. For instance, if an investor sells stock at a loss and their spouse buys the same stock, the wash sale rule applies. The rule aims to capture scenarios where the economic position remains unchanged.
Impact of a Wash Sale
When a wash sale occurs, the loss from the original sale is disallowed for tax purposes in the current year. This means the investor cannot use that loss to offset capital gains or other income. The disallowed loss is not permanently lost; its recognition is deferred.
The disallowed loss is added to the cost basis of the newly acquired “substantially identical” security. This increases the new shares’ cost basis, impacting future gain or loss calculations. For example, if shares bought for $1,000 were sold for $750 (a $250 loss) and repurchased for $800 within the wash sale window, the $250 loss is disallowed. The repurchased shares’ cost basis becomes $800 plus the $250 disallowed loss, totaling $1,050.
This basis adjustment defers the original loss recognition until the new shares are sold, assuming no further wash sale. The original shares’ holding period is added to the new shares’ holding period for tax purposes. This influences whether a future gain or loss is short-term or long-term, affecting tax rates.
Managing Wash Sales for Tax Purposes
Taxpayers must track and report wash sales on their tax returns. Brokerage firms report sales and cost basis on Form 1099-B, often indicating wash sales and disallowed losses. However, brokers may lack complete information, such as purchases in different accounts or by related parties, making personal record-keeping important.
When preparing a tax return, taxpayers use Form 8949 and Schedule D to report stock transactions. On Form 8949, the disallowed wash sale loss is entered in column (g), and the adjusted basis of repurchased shares in column (e). Proper reporting ensures correct capital gains or losses calculation.
To avoid a wash sale, investors can implement several strategies. The simplest is to wait at least 31 days after selling a security at a loss before repurchasing the same or a substantially identical security. Alternatively, consider purchasing a non-substantially identical investment, like an exchange-traded fund (ETF) tracking a broad market index, or a stock in a different company within the same industry. These steps help investors realize losses without violating the wash sale rule.