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Tuesday, March 07, 2006

Wash Sales on Stocks and Bonds and Options

In December of 2005, I sold off a lot of my stocks that were trading at a loss from what I had paid for them, in order to generate some capital losses to offset some gains (sometimes called 'Loss Farming'). However in January, I was looking over what I had sold and wondering if I should get back in to some of these positions. But before I did, I had to take into consideration the wash sale rule which prohibits taking a loss if the stock is repurchased within 30 days. What's the exact rules on this? Here it is from the IRS:
You cannot deduct losses from sales or trades of stock or securities in a wash sale. A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you: 1. Buy substantially identical stock or securities. 2. Acquire substantially identical stock or securities in a fully taxable trade, or 3. Acquire a contract or option to buy substantially identical stock or securities. If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale. If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold.

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