The wash sale rule is designed to prevent investors from taking a tax deduction for a security sold in a wash sale. A wash sale occurs when an investor sells or trades a security at a loss and, within 30 days before or after this sale, buys a substantially identical security. This rule disallows the deduction of the capital loss from a wash sale for tax purposes.
Even if the transaction is offset by a gain, the wash sale rule can still apply. The rule focuses on the purchase of a substantially identical security within the specified period, not the net gain or loss from the transaction as a whole. Therefore, if you offset a loss with a gain in such circumstances, the loss would still be disallowed because the wash sale rule looks at the nature and timing of the repurchased security, irrespective of whether there was an overall gain from the investing activities.
However, if the security is repurchased outside the 30-day window, the rule does not apply since the purchase is not considered a wash sale. Additionally, for tax purposes, even though the loss is initially disallowed, it’s not lost forever; rather, the disallowed loss is added to the basis of the newly purchased, substantially identical stock, effectively deferring the benefit of the loss to a future date when the securities are sold outside of the wash sale period.
No responses yet