Don't Be Caught Red-Handed By The Wash Sale Rule
Published Monday, May 15, 2017 at: 7:00 AM EDT
It often makes sense to "harvest" capital losses from securities transactions to offset capital gains. Any losses that exceed your gains can offset up to $3,000 of ordinary income for the year.
But not all investment losses are deductible. Under the "wash sale rule," a capital loss is disallowed if you acquire substantially identical securities within 30 days of the sale. This rule often trips up unwary investors.
When are securities "substantially identical?" The definition is murky, but stocks and bonds of different companies are not substantially similar. However, buying and selling shares of mutual funds within the same family could trigger the rule.
Fortunately, it's relatively easy to avoid making wash sales. You simply can wait more than 30 days to acquire substantially identical securities. Or if you want to pounce now on a particular offering, you could do that and wait more than 30 days to sell the original shares.
Be careful not to get boxed in by the wash sale rule at the end of the year. Allow yourself enough time to sell your shares.
If a loss is denied, at least there's a silver tax lining: The amount of the disallowed loss is added to the basis of the new securities, and that will have the effect of decreasing your taxable gain or increasing your deductible loss on a future sale.
This article was written by a professional financial journalist for Preferred NY Financial Group,LLC and is not intended as legal or investment advice.
An individual retirement account (IRA) allows individuals to direct pretax incom, up to specific annual limits, toward retirements that can grow tax-deferred (no capital gains or dividend income is taxed). Individual taxpayers are allowed to contribute 100% of compensation up to a specified maximum dollar amount to their Tranditional IRA. Contributions to the Tranditional IRA may be tax-deductible depending on the taxpayer's income, tax-filling status and other factors. Taxed must be paid upon withdrawal of any deducted contributions plus earnings and on the earnings from your non-deducted contributions. Prior to age 59%, distributions may be taken for certain reasons without incurring a 10 percent penalty on earnings. None of the information in this document should be considered tax or legal advice. Please consult with your legal or tax advisor for more information concerning your individual situation.
Contributions to a Roth IRA are not tax deductible and these is no mandatory distribution age. All earnings and principal are tax free if rules and regulations are followed. Eligibility for a Roth account depends on income. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
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