Investors often try to offset big gains realized throughout the year by looking for unrealized losses in their portfolio and then selling these other assets at a loss. Following this strategy by year end can reduce your 2017 tax liability. However, if the only reason for selling is to minimize the impact on your asset allocation and you plan to buy the investment right back, you should be aware of the wash sale rule.
The rule up close
The wash sale rule prevents you from taking a loss on a security if you buy a substantially identical security (or an option to buy such a security) within 30 days before or after you sell the security that created the loss. You can recognize the loss only when you sell the replacement security.
Keep in mind that the rule applies even if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.
Achieving your goals
Fortunately, there are ways to avoid the wash sale rule and still achieve your goals:
- Sell the security and immediately buy shares of a security of a different company in the same industry or shares in a mutual fund that holds securities much like the ones you sold.
- Sell the security and wait 31 days to repurchase the same security.
- Before selling the security, purchase additional shares of that security equal to the number you want to sell at a loss. Then wait 31 days to sell the original portion.
If you have a bond that would generate a loss if sold, you can do a bond swap, where you sell a bond, take a loss and then immediately buy another bond of similar quality and duration from a different issuer. Generally, the wash sale rule doesn’t apply because the bonds aren’t considered substantially identical. Thus, you can achieve a tax loss with virtually no change in economic position.
If you have questions or want more ideas about how to save taxes on your investments, JLK Rosenberger can help. For more information, call us at 949-860-9902 or click here to contact us.