As an investor, you are permitted to buy and sell shares of the same stock whenever you want, including within a 30-day period. However, when it comes time to file your income taxes, buying and selling the same stock within a 30-day period may trigger wash sale rules, which can affect how much you can deduct for your losses on your income taxes.
Wash Sales Defined
The wash sale period extends 30 calendar days prior to and 30 calendar days after you sell a particular stock. For example, if you sell 200 shares of DEF on Aug. 31, you would have a wash sale if you buy 200 shares of DEF between Aug. 1 and Sept. 30. If you had purchased shares in July, or made a later purchase of DEF shares in October, you would not have to worry about the wash sale rules.
When you have a wash sale, you cannot claim any loss on the sale of the stock that you sell. For example, if you purchased 200 shares of DEF years ago for $10,000, the value dropped to $6,000 when you sold it, and then within 30 days you purchased another 200 shares, you would not be able to claim the $4,000 loss on the sale of stock on your income taxes that year, not even to offset other gains from the year.
When you perform a wash sale, you must recompute your basis in the newly purchased stock by adding the amount of the disallowed loss to your new basis. For example, if you purchased shares for $80 per share and sold them for $55 per share, you would be entitled to a $25 loss per share. However, if you repurchased the shares within the wash sale period, the loss would be disallowed. If the repurchase price was $58 per share, add the $25 per share disallowed loss to find your new basis in the shares equals $83 per share.
Only Applies to Replacement Shares
The wash sale rules only apply to replacement shares of stock. If the stock being bought does not replace the stock sold, the wash sale rules do not kick in. For example, if you purchase 100 shares of DEF and then sell them five days later, the sale falls within the 30 days before and 30 days after range of wash sale, but the wash sale rules are not triggered because you are simply selling shares that you bought rather than replacing the shares that you sold.
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