Wash Sales - How to avoid

As an active trader, you may not be able to avoid each and every wash sale that may come along, due to the fact that you are in and out of trades frequently and some losses are inevitable.  Yet you really don't have to worry too much about the net affect of wash sales until year end. 

Here are two simple rules to keep in mind that can greatly reduce your risk of having some or all of your losses disallowed for the current tax year and deferred to a later tax year:

• If you take losses in December don't buy back the same stock for 31 days.
  If you take losses in any stock in December, be sure NOT to re-purchase the same stock (or an option on that stock) for  a period of 31 days. If you do, your losses will be deferred to a later tax  year.  You won't permanently lose the loss, it will just move forward and you will have a greater tax consequence in the current year.
  
  Use your TradeLog™ software to run the Gains and Losses report for the month of December and take note of any and all losing trades.  Avoid the deferral of your December losses to the next tax year by not purchasing the same stock in January or late December and then holding it open till next year.  You can run the Gains and Losses report often during this critical time period.
   
• Close out any open positions at year end that have accumulated wash sale losses. 
  If you have any open positions at year end that have wash sale losses attached to them, these wash losses must be deferred to a later tax year.  To avoid this unpleasant situation, close the open position that has a large wash sale loss attached to it and do not trade this stock again for 31 days.

Our TradeLog™ Wash Sale Detail report can help you to spot these situations so that you can take the appropriate action before it is too late!

Wash rule advice

Many web resources advise you to stop trading a stock for 31 days any time a loss is incurred to avoid triggering a wash sale adjustment.  However, as explained above this is quite unnecessary.

The only critical time period is in the month of December where losses realized in December, or wash sale losses attached to open positions can turn around and bite you!  But if you have the right tools you can easily spot these conditions, take the necessary action, and lessen your tax bite come April 15.

So keep trading those stocks and options if you think you can make a profit!  Take your losses as they come. Stop trading them when you realize that you are no longer profitable in that equity, or if you are about to take a big tax hit at year end.

If you absolutely, positively must trade that losing stock or want to hang on to open shares with a large wash sale loss attached to them, be sure to have a good reason for doing so and be aware of the tax consequences of your trading.  The more knowledge that you have at year end, the better equipped you are to make such a decision.