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Rules for Investing

Investing in the stock market can be profitable, but it also comes with several complexities and rules that investors must know. The rule we are writing about today is the wash sale rule. The wash sale rule can significantly impact an investor's taxes and investment strategy.

What is the “Wash Sale” Rule

The wash sale rule prohibits investors from claiming a loss on the sale of a security if they purchase or acquire a substantially identical security within 30 days of the sale. Essentially, if an investor sells a security at a loss and then buys the same security or a similar one within 30 days, they cannot use the loss to offset gains in the current tax year. Instead, the loss gets added to the cost basis of the newly purchased security.

How does it affect me?

The purpose of the wash sale rule is to prevent investors from manipulating their taxes by artificially creating losses. For example, an investor could sell a security at a loss to offset gains in the current tax year and then immediately repurchase the same security to maintain their position in the market. Doing so would allow the investor to avoid paying taxes on the gains while still holding the security they want.

While the wash sale rule may seem straightforward, there are some nuances that investors need to be aware of. For one, the rule applies not only to identical securities but also to substantially similar securities. If an investor sells a stock in one company and then purchases a stock in a similar company within 30 days, the wash sale rule may still apply.

Additionally, the wash sale rule only applies to losses, not gains. An investor can sell a security at a gain and immediately repurchase the same security without triggering the rule. However, the investor will still be responsible for paying taxes on the gains.

It is important to note that the wash sale rule applies to individual and institutional investors, including mutual funds. Mutual fund investors need to be aware of the rule when buying and selling shares of the fund, as the fund may be buying and selling securities on their behalf.

Strategy, Strategy, Strategy

Selling at a loss in your Brokerage Account (aka Bridge Account) may allow you to claim that loss on your taxes, but making a mistake and triggering a wash sale can ruin that, so it is essential to know the appropriate actions.

What are the appropriate actions to take to avoid a wash sale? One strategy is to wait at least 31 days before repurchasing a security sold at a loss. This allows you to claim the loss on your taxes while maintaining your market position. Another option is to purchase a similar but not substantially identical security.

It can be tricky to know what a similar but not substantially identical security is, so having a Financial Advisor help you with this strategy is important. The Advisors at Whitaker-Myers Wealth Managers are familiar with this rule and its nuances, so feel free to contact one of them for help.


June 29, 2023

Kelly Kranstuber

Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm.  The information presented is for educational purposes only and intended for a broad audience.  The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed.  Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner. 

Whitaker-Myers Wealth Managers is not giving tax, legal or accounting advice, consult a professional tax or legal representative if needed. 

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