The saving grace of making a poor stock or mutual fund investment in a taxable account is that you at least get a capital loss when you sell. The loss can then offset gains from your more successful investments, unless the dreaded wash sale rules disallow your writeoff.

Please understand, however, that this righteous concept applies only to losses. If you sell for a gain and buy back identical stocks or securities within the above time frame, Uncle Sam is happy to collect his due with no qualms.

Options are included in the definition of stocks and securities, so you can also have a wash sale when you unload options at a loss. But for the wash sale rules to come into play, the stocks or securities must truly be substantially identical.

Stocks or securities issued by one corporation are not considered substantially identical to stocks or securities of another.

Unfortunately, the IRS begs the question by saying only that all circumstances must be considered in evaluating whether stocks or securities are substantially identical.

Wash Sales and Substantially Identical Securities

What the heck does that mean? In my opinion, no mutual fund is substantially identical to another.

Using Options in Wash-Sale Trades - Barron's

Your tax loss is still disallowed. Ditto if your controlled corporation or IRA makes the buy, according to the IRS. Instead, it gets added to the basis of the replacement securities. When you sell them, your disallowed loss effectively reduces your gain or increases your loss on that transaction. Say you purchased shares of XYZ Co. In addition, the holding period for the replacement shares includes the Dec.

Wash-Sale Rule

When you file your return, report the wash sale on Part I of Form , which feeds into Schedule D, since it was a short-term transaction See the Schedule D instructions for full details on reporting wash sales. What happens if the number of replacement shares purchased during the forbidden day period is less than or greater than the number of shares sold in the loss-sale transaction? The following two examples illustrate the answers. You bought shares of XYZ Co. Also, you get to extend the holding period for both sets of shares by the Dec.

Since you bought replacement shares within 30 days of the loss sale, your entire loss is disallowed. In this case, you add the entire disallowed loss to the basis of the first replacement shares, which are those purchased on March 1. You also get to extend the holding period for those shares by the Dec. The wash sale rules apply equally to losses from sales of mutual fund shares held in a taxable account. In fact, wash sales are quite likely to apply if you have arranged for automatic reinvestment of your dividends.

Again, the disallowed loss is added to the basis of the replacement shares purchased within the forbidden day period. This advertisement is provided by Bankrate, which compiles rate data from more than 4, financial institutions. Bankrate is paid by financial institutions whenever users click on display advertisements or on rate table listings enhanced with features like logos, navigation links, and toll free numbers.

Dow Jones receives a share of these revenues when users click on a paid placement. By using this site you agree to the Terms of Service , Privacy Policy , and Cookie Policy. Intraday Data provided by SIX Financial Information and subject to terms of use.

Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U. Intraday data delayed at least 15 minutes or per exchange requirements.

ET Updated Amazon Wardrobe is another blow to department stores. Oracle soars toward record highs after earnings beat. Cozying up to consumers in the face of competition from Adidas, Under Armour.

Breaking Nasdaq Composite ends higher to buck downtrend. Breaking Fed open to reducing regulatory burdens on banks, Powell says. Updated Oil spirals to month low as U. This is what siblings argue about regarding money and the hot new perk at work.

Uber IPO prospects may be helped by resignation of CEO Travis Kalanick. Home News Viewer Video SectorWatch Podcasts First Take Games Portfolio My MarketWatch. Retirement Retire Here, Not There Encore Taxes How-to Guides Social Security Estate Planning Events Columns Robert Powell's Retirement Portfolio Andrea Coombes's Working Retirement Tools Retirement Planner How long will my money last? Economy Federal Reserve Capitol Report Economic Report Columns Darrell Delamaide Rex Nutting Tools Economic Calendar.

My MarketWatch Watchlist Alerts Games Log In. New York Markets After Hours Market Snapshot Winners and Losers.

Home Personal Finance Taxes Tax Guy Get email alerts. The wash sale rule is a nasty little piece of tax code. What happens to your loss? Mutual fund shares The wash sale rules apply equally to losses from sales of mutual fund shares held in a taxable account.

A Primer on Wash Sales

This story has been updated. Related Topics Taxes Tax Credits Capital Gains Tax Income Tax Property Taxes. Powered by This advertisement is provided by Bankrate, which compiles rate data from more than 4, financial institutions.

Other News From Our Partners. APR Last Week 6 Months Low Interest We Want to Hear from You Join the conversation Comment. MarketWatch Site Index Topics Help Feedback Newsroom Roster Media Archive Premium Products Mobile. Dow Jones Network WSJ.