Senior Estate Planner Mike Repak discusses various techniques to navigate around the wash sale rule.
It is always wise for investors to review different aspects and rules of investing, such as the wash sale rule, in order to be prepared for any shifts in the market. Of course, experienced investors know the effect of this rule is to disallow tax losses
where someone sells an investment at a loss, and within 30 days before or after, acquires a “substantially identical” investment or an option to acquire the same. Since investors frequently want to harvest tax losses without giving up
on the eventual run-up in an investment, the limits of the wash sale rule are useful to keep in mind for those people who would rather not risk being completely out of an investment for 30 days.
A few techniques may be available to limit the impact of the wash sale rule. Investors should review the advisability of these approaches with their own tax advisor to see how they could benefit their unique situation. Taking a reporting position in the “gray area” of tax law requires an assessment of each investor’s appetite for tax risk. However, investors may wish to keep a few points in mind as they look to harvest losses in the approach to year-end.
Trading in more than one account can greatly increase the chances that losses will be reported incorrectly on an investor’s tax return. Regulations require broker’s to identify wash sales that occur within a single account, but the taxpayer is solely responsible to keep track of this information where the trading occurs in different accounts. An instance where wash sales are reported incorrectly because multiple accounts are involved, could, if detected on audit, result in an assessment for underpayment of taxes, interest, and possibly a negligence penalty.
An investor can safely replace a stock that’s been sold at a loss with a different but correlated investment. However, it is important to note that even correlated investments might move unpredictably over a 30-day period.
Another safe approach would be for an investor with two loss positions to sell one of them, take the proceeds from the sale, and invest more in the other loss position. After 31 days, the older shares in the second stock could be sold (using specific lot identification) and the position in the first stock could be reestablished.
In the case of a fund, an index fund could be replaced with a managed fund safely. It’s a closer case if one index fund is replaced with another. A safer approach would be to replace an index fund with a basket of funds.
Although it’s clear that the wash sale rule would disallow a loss if an investor sold a stock and either bought a call or sold an “in the money” put within 30 days. However, it’s arguable that if an investor sold an option on a stock at a loss and replaced it with the stock itself, the language of the wash sale rule might not apply.
Investors holding investments that have declined in value may want to consult with their Janney Financial Advisor about strategies to allow them to harvest the losses for tax purposes which minimize the risk of being on the sidelines for the period required to satisfy the wash sale rule.
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Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.