How to keep your tax loss claims clean – Forbes Advisor
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One of the advantages of the US tax code is that if any of your investments end up in the red, you can sell it at a loss and reduce your taxable income. Just be careful not to redeem the same title too early (or a substantially similar title), or you could end up breaking the rule of wash sale.
What is a wash sale?
A wash sale involves selling an investment and then buying back the asset or a similar asset, often at a similar price. It’s the investment equivalent of the saying “it’s a wash” because selling and redeeming effectively has no impact on the makeup or performance of your portfolio.
So why bother with a linen sale in the first place? To claim a loss for tax purposes.
The Internal Revenue Service (IRS) allows single filers and married couples filing jointly to deduct up to $ 3,000 in realized losses from their ordinary income. Married couples who file separately can each deduct $ 1,500 from their regular income.
If you have more than $ 3,000 in realized losses, the excess losses can be carried forward to future tax years in increments of $ 3,000.
What is the wash sales rule?
The blank sale rule prohibits an investor from benefiting from a tax deduction if they sell an investment at a loss and redeem the same investment, or a substantially identical investment, within 30 days before or after the sale.
Because this includes the day you sell your investment, it is actually 61 full days during which you (or even your spouse or a company you control) cannot purchase an investment that is sufficiently the same or similar in the eyes of the client. ‘IRS. Otherwise, your transaction may be considered a wash sale, leaving you unable to claim the losses you have suffered.
This is intended to prohibit bad faith investors from using temporary declines in the value of an investment to get tax relief, and then turning around and redeeming the same investment to get a potentially better cost base on which to pay off. all future income taxes will be calculated.
What does the wash sale rule cover?
The indirect selling rule covers any type of identical or substantially identical investments sold and purchased within the 61-day window by an individual, their spouse or a business they control.
“It’s hard to accidentally break the rule [with stocks]”, Explains Leslie Sauer, Chartered Accountant (CPA). The IRS makes it clear that the shares would normally have to come from the same company to trigger the wash sale rule, according to Sauer.
In other words, you should sell the shares of Company A and then buy back the shares to have a wash sale. If you bought the shares of Company B instead, even though they are in the same industry, you should be fine.
That said, things can get a bit more complex when it comes to mutual funds and exchange traded funds (ETFs). You can’t, for example, sell the index fund of one company and then buy the index fund of another company that tracks the same index, or even one that contains most of the same companies.
It’s important to note that the wash sale rule extends to all of your various financial accounts, from a taxable brokerage account to your 401 (k).
“You [can’t] sell the investment at a loss in one account and buy it back in another account, such as an Individual Retirement Account (IRA), ”says Jason Dall’Acqua, Chartered Financial Planner (CFP) and President of Crest Wealth Advisors. “This would prevent the use of the loss since both accounts are your property. “
What happens if you sell laundry products?
If you trigger the wash sale rule, whether intentionally or not, the IRS will not allow you to claim this loss on your taxes in current years or, if it’s large enough, in years to come.
If you were relying on this to offset your capital gains or reduce your taxable income, you may have to pay more taxes than you expected. This can really put the brakes on some people’s tax loss harvesting strategy.
However, you can still see some benefits from your wash sale. You can add the amount of your loss to the cost of buying back the same investment or a substantially identical investment. This increases your cost base, which can save you money on your capital gains tax later.
How can you avoid the wash sale rule?
If you’re worried about incurring a wash sale, you can usually avoid triggering it by doing one or more of the following:
Wait 30 days
Waiting to buy the same or a similar investment for the entire 30-day period after you sell your investment is the surest way to avoid a no-effect sale. (You’ll also want to make sure that you haven’t purchased the same or a similar investment on the day of the sale or in the 30 days before your sale.)
Some investors can get a little crazy, so if you can’t stand having your money put aside, be sure to put it in a significantly different investment.
Find a materially different investment
While the IRS rule on what constitutes “substantially the same” isn’t very clear, the bottom line is that the government doesn’t want you to get tax relief for something that isn’t really a loss for you. you.
“Let’s say you sold an investment in technology,” Sauer says, “finding another investment that is also in technology but further removed from the one you sold could be a strategy to avoid a wash sale. You can also consider buying a fund that covers the same industry or a similar industry to the stock you sold.
To be extra careful, you can be sure that you will avoid the rule of selling linen if you invest in a completely different industry or sector. If you’re not entirely sure what the difference is in your alternative investment, Sauer suggests consulting a financial advisor or tax professional. You can also consider using a robo-advisor to do your tax loss crop for you.
Have an investment plan
Investors who are not prepared for short-term market downturns may accidentally trigger the sell rule to no effect if they panic and then buy back the same investment once the market begins to recover.
Having a long-term investment plan that you stick to, even during market downturns, can help you make the best investment and tax decisions for good times and bad.
SoFi automated investment
SoFi automated investment
Does the wash sale rule apply to cryptocurrency?
Because it is not technically a stock, the cryptocurrency is not subject to the wash sale rule, according to Dall’Acqua.
This means that crypto investors have the opportunity to sell their coins at a loss, benefit from the tax deduction of that loss, and immediately redeem the same cryptocurrency. Recent congressional proposals would fill this gap, potentially as early as January 1, 2022. These are not yet set in stone and likely would not be retroactive to 2021, so if you plan to claim crypto losses in 2022 and beyond. beyond that, make sure you speak to a tax advisor first.