Ep. 60 - Knowing This Rule When Trading Stocks Can Save You Taxes

Red Barn Financial Podcast

Ep. 60 - Knowing This Rule When Trading Stocks Can Save You Taxes.

There is a rule known as the wash sale rule under IRS Code Section 1091 that essentially will prevent you from taking a loss on the sale of a stock if you buy the same stock or security back in a short period of time. This time period is 30 days prior to the loss sale and 30 days after the loss sale. So adding the day of the sale that means 61 days.

For example if you bought stock worth $10,000 and you sold it later for $9,000, you would have a $1,000 loss. Let's assume 20 days later you see that the stock looks like a good deal again and you go ahead and buy it at $8,000. Because you weren't without the stock for 30 days after the sale, you can't take the loss. Similarly, let's assume you buy a stock for $100. You then find that it is a bit cheaper at $98 so you buy another share for $98. You then see it go down to $95 twenty days later and you get scared so you sell off one share and keep the other share. You can't take the loss, because you bought more before the sale within 30 days.

When you don't get to take the loss, you don't lose it forever, you just have to add the loss to the cost of the held share. In my first example, the second purchase was for $8,000 but you had a loss on the sale of $1,000, so your basis in the shares is $9,000 rather than $8,000. That means you would have a loss if you sell those shares for less than $9,000 and wait at least 30 days more.

If you would like to know more about this topic or speak to someone at Red Barn Financial, you can contact us at 615-619-6919 or at www.redbarnfinancial.com

Disclaimer: The information provided in the Red Barn Financial Podcast is not tax, legal or investment advice. Every person's situation is different and you should consult your advisors before making any financial decision.