What is a wash sale?

Some of you may be aware of the potential benefits of selling stock/securities for a loss. (The loss may be used to write-off certain income – I posted about this earlier in the week.)

The IRS was concerned that people would sell a stock to create such a loss – and then immediately re-purchase the very same stock.

Essentially, people would be maintaining their position in this stock, while creating this “artificial” loss to take advantage of.

This is called a “wash sale.”

In response, the IRS established the “wash sale rule”:

You cannot purchase the same stock (that you sold for a loss) 30 days before or 30 days after you sold it.

If you do purchase it, the loss will be disallowed until a later date.

There are potential options to work around this, but if you are selling stock for a loss, you definitely need to be mindful of this rule.