The wash sale rule is a tax rule that applies to the sale of securities at a loss. It disallows a tax deduction for a loss on a security if the same or a substantially identical security is purchased within 30 days before or after the sale. The wash sale rule applies to both buying and selling the same security, and it applies to both long and short-term capital gains and losses.
The purpose of the wash sale rule is to prevent taxpayers from taking advantage of the tax benefits of losses on securities without actually changing their investment positions. In other words, the rule is designed to prevent taxpayers from selling a security at a loss, buying it back soon after, and then claiming the loss as a tax deduction while maintaining their investment position.
It’s important to note that the wash sale rule only applies to securities, such as stocks and bonds, and not to other capital assets, such as real estate or collectibles.
When the wash sale rule applies, the disallowed loss is not lost forever, it is instead added to the cost basis of the new security. This means that the disallowed loss is deferred until the new security is sold.
For example, if you sell a security for a $1,000 loss, but then purchase the same security within 30 days, the loss is disallowed and added to the cost basis of the new security. So, if you later sell the new security for $1,500, your gain or loss will be $500, which is the difference between the sale price and the adjusted cost basis, which is the original purchase price of the new security plus the disallowed loss.
It’s important to keep track of the disallowed loss and the adjusted cost basis, so that when you do sell the new security, you can accurately report the gain or loss on your tax return. Some tax software, like TurboTax, can help you with this calculation.