Stock market investors may wish to take advantage of the tax benefits of losses on stocks whose values have declined in troubled markets, while repurchasing those same stocks to benefit from recoveries in value when the market improves. While buy and sell transactions of the same stock may not be prohibited by your trading tools, be aware of the Internal Revenue Service rules on wash sales and understand their impact before you buy or sell.
Buying And Selling
Stock can be bought and sold within the same day (called day trading), and as long as you have cash available in your portfolio or sufficient margin available, you can buy stock at any time. The U.S. Securities and Exchange Commission (SEC) defines margin as borrowing money from a broker to buy stock, and using the stock as collateral for the loan.
Pattern day traders are defined by the SEC as traders who execute four day trades within five days or whose day-trading activities represent more than 6 percent of their total trades within those five days. They will be required to deposit $25,000 minimum equity in their trading account on any day in which day trades are executed. This requirement may limit the timeframe in which you can buy stocks you have previously sold.
Section 1091of the Internal Revenue Code defines loss deductibility rules related to the sale and purchase of the same or substantially identical stock within short times frames, called wash sales. Section 1091 disallows losses incurred on stock purchases within a 61-day period beginning 30 days before the stock sale date and ending 30 days after the sale date.
Failure to observe the wash sale rules results in the disallowance of any loss because the investor is in essentially the same economic position at the beginning and the end of the 61-day period.
Investors who participate in stock purchases through payroll deductions or dividend reinvestment programs (DRIPs) may violate wash sale rules inadvertently. If shares are sold within 30 days before or after additional shares are purchased through a DRIP or employee stock purchase plan, the IRA’s wash sale disallowance will be invoked.
A sale by one spouse and the subsequent purchase by the other spouse of the same stock also will trigger the wash sale loss disallowance, as will purchases and sales through trusts or corporations controlled by the taxpayer.
The wash sale rules apply to option contracts for substantially identical stocks and to buy transactions for your IRA or Roth IRA.
- U.S. Securities and Exchange Commission: Margin: Borrowing Money to Pay for Stocks
- Financial Industry Regulatory Authority: Day-Trading Margin
- Internal Revenue Service: Sales and Trades of Investment Property, Wash Sales
- Securities and Exchange Commission. "Wash Sales." Accessed April 14, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)," Page 56. Accessed April 14, 2020.
- Internal Revenue Service. "Internal Revenue Bulletin: Rev. Rul. 2008-5." Accessed April 14, 2020.
- Fidelity Investments. "Tax Rules for Losses on ETFs." Accessed April 14, 2020.
- Internal Revenue Service. "Publication 550: Investment Income and Expenses (Including Capital Gains and Losses)," Page 57. Accessed April 14, 2020.
- Internal Revenue Service. "2019 Instructions for Form 8949." Accessed April 14, 2020.