Rule #1 Finance Blog

With Investor Phil Town

WHAT’S A WASH SALE?

Phil_town_86 Phil Town got a question about Wash Sales often enough I thought I'd
plunge in and give you my humble opinion even though I'm not an
accountant… so don't take action on this in any serious way without
consulting an expert to verify. 

A Wash Sale happens when you
sell a stock, take a loss and then buy the same stock back all within
30 days.
  Some people sell a stock to take the loss in order to
offset a gain in some other stock.  The IRS is okay with
that.  But if you buy the stock back right away, the IRS is
thinking you want to take the loss to offset some other gain but you
don't really want to take the loss… which is why you bought the
stock back right away.  So they say you can't have your cake and
eat it too and they disallow the loss as a deduction.  Is this a
problem?  Read on.

Since I am following little red and green arrows on my wonderful
businesses that I am buying at attractive prices, I find that I
sometimes buy then sell with say a 4% loss and then buy again… all
within 30 days.  If you do what I do, it's bound to happen to you,
too.

When that happens I did a Wash Sale and [drum roll]… I
cannot deduct the loss from my gains that year.
  Well,
okay.  So what?  Unless I'm continuing in my folly of
losing money over and over again on this stock, the Wash Sale thing
won't matter to me at all because at the end of the year, I didn't
lose money on the stock.  I made money on it, even though I had a
few small losses through the course of the year.

 

But what if I screw up and keep losing?  Can I take
the loss and deduct it eventually?
The short answer is
yes.  While I can't deduct that specific loss (since I bought the
stock back within 30 days) eventually I will dump this dog for good and
then I can finally take the deduction.  (If you find yourself in
this very none Rule #1 situation definitely see an accountant to sort
out how to max out the deduction.  And it might make sense to NOT buy the
dog back in December since you'll run out of days before the end of the
tax year, and then the Wash Rule will get you.  But again, talk to
a pro.)

 

And with regard to taxation in general just remember that a
Rule #1 investor never ever makes a decision to get out or not based on
taxes.
  We're getting out because of one of just three
things: 

  1. the business has ceased to be wonderful,
  2. the price has ceased to be attractive, and/or
  3. the big guys are getting out. 

In this market, staying in when the big guys are getting out can
lead you to hold on to Google at $440 and waking up a couple of weeks
later with Google at $340.  We Rule #1 types consider that to be a
mistake.  By acknowledging that the big guys know more than we do,
we just get out when they do and avoid the pain.

 

And if you hate taxes on investing go to www.fairtax.org,
read up on a tax system proposal that will stop waste, increase
productivity and jobs, tax the rich more and not the poor and then
write your congresswoman and tell her to get rid of the current tax
system and replace it with a fair tax or you'll fire her.

 

Now forget the Wash Rule and go play.