The Internal Revenue Service says a “wash sale” typically occurs when you sell or trade stock or other securities at a loss—and within 30 days before or after the sale, you buy the same stock or “substantially identical” securities. If you violate that rule, you typically can’t deduct your loss. See Publication 550 at www.irs.gov.
As the end of the year approaches, smart investors look for ways to reduce their tax burden. One way to do this is to sell securities in which they have losses. The IRS says that you have to be “at risk” for 30 days to claim a loss for tax purposes. What this means is that after you sell a security you can’t buy it – or a substantially identical security – back for 30 days . If you do, you can’t deduct the loss.
But suppose you believe that the security will go up during the 30 days you don’t own it. There is a way to take care of that. Let’s say you own 100 shares of XYZ and have it loss in it. You can buy another 100 shares of XYZ, hold both the original shares and the new 100 shares for 30 days and then sell the old “losing” shares after the 30 day period is up. If you use this strategy, make sure that you specify the shares you are selling so that there is a record of which shares are being sold at a loss and which are being held for future appreciation.