Tax Loss From Wash Sale of Securities Lawyers

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What is Tax Loss From Wash Sale of Securities?

When a taxpayer sells stocks or securities held for investment at a loss, he/she will usually be able to take this capital loss as a deduction against his/her capital gains. However, if the taxpayer engages in a wash sale transaction, then any losses that result from it may not be deducted.

 

What is a Wash Sale?
 


A wash sale is a transaction where a taxpayer has sold stocks or securities at a loss and has acquired or entered into a contract/option to acquire "substantially identical" stocks or securities to the ones sold within 30 days before the date of sale and 30 days after the date of sale.

If the taxpayer's sale results in a loss, then that loss will be disallowed. For example:

T purchases 20 shares of ABC Inc. 5 days after he sold 20 shares of ABC Inc. at a loss of $50. That $50 will not be allowed as a deduction for T.

Complications arise when the number of stocks acquired by the taxpayer does not match the number of stocks sold. The tax treatment in those cases depends on whether more or lesser number of stocks is purchased.

 

Does the Wash Sale Rule Apply to Sales that Result In a Gain?

No. The wash sale rule only disallows the deduction of losses. Any gain that results from a wash sale will normally be taken into income.

 

What Will Happen To the Disallowed Losses? Are They Lost Forever?

They are not lost forever. When losses are disallowed from a wash sale, they are added to the basis of the newly acquired "substantially identical" stocks/securities. For example:

In the previous example, T has purchased the 20 shares of ABC Inc. for $50. The basis of these stocks would be $100 ($50 cost + $50 disallowed loss).

 

What is "Substantially Identical"?
 


The definition of "substantially identical" depends on the facts and circumstances of a particular case, and so it can mean different things in different situations. Generally, stocks from one company are not "substantially" identical to another company, even though they may be the same size and in the same industry. Furthermore, bonds and preferred stocks are also usually not "substantially identical" to common stocks from the same company.

 

Is the Holding Period of My Stocks Sold At a Loss in a Wash Sale Tacked Onto the Newly Acquired Stocks?

Yes. The period you held the stocks you sold at a loss in a wash sale will be added to your acquired stocks. Continuing the previous example:

T had held the 20 ABC Inc. stocks that he sold for 3 years at the time of the sale. T's holding period for those new 20 shares of ABC Inc. would be 3 years and 5 days, thereby given T long-term capital treatment.

 

Do I Need an Attorney to Help Me with My Tax Problems?

Tax laws are complex and ever-changing. Although there are various tax preparation softwares on the market that may help you with your tax problems, they cannot provide the same level of service that an experienced and knowledgeable tax attorney can. If you are unsure about the characterization of your losses or you need someone to represent you before the IRS, a tax attorney can help you.

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Last Modified: 07-22-2009 04:02 PM PDT

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