For your year-end tax planning, beware the wash sale rule | J.P. Morgan Private Bank U.S. (2024)

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For your year-end tax planning, beware the wash sale rule | J.P. Morgan Private Bank U.S. (2024)

FAQs

How do you avoid the wash sale rule? ›

To avoid a wash sale, you could replace it with a different ETF (or several different ETFs) with similar but not identical assets, such as one tracking the Russell 1000 Index® (RUI). That would preserve your tax break and keep you in the market with about the same asset allocation.

What is the wash sale rule for taxes? ›

A wash sale is a transaction in which an investor sells or trades a security at a loss and purchases "a substantially similar one" 30 days before or 30 days after the sale. 1 This is a rule enacted by the Internal Revenue Service (IRS) to prevent investors from using capital losses to their advantage at tax time.

What happens if I accidentally do a wash sale? ›

The IRS will disallow your loss, and you won't be able to claim a write-off on your tax return. You'll end up owing taxes on any income that you tried to offset with your wash sale. If you're not current on your taxes, you can incur typical penalties for non-payment, including fines.

How do I report wash sale loss disallowed on my tax return? ›

When you report the sale of the newly purchased stock, you will adjust the basis to account for the loss. Report the new basis (from example above) of $550 (50 shares X $6 per share = $300 Plus $250 wash sale loss added to basis equals cost basis of $550) as the cost.

Can you get in trouble for a wash sale? ›

A wash sale itself is not illegal. Claiming the tax loss on a wash sale is, however, illegal. The IRS does not care how many wash sales an investor makes during the year.

How much stock can you sell without paying taxes? ›

Capital Gains Tax
Long-Term Capital Gains Tax RateSingle Filers (Taxable Income)Head of Household
0%Up to $44,625Up to $59,750
15%$44,626-$492,300$59,751-$523,050
20%Over $492,300Over $523,050

Should I worry about wash sales? ›

The IRS determines if your transactions violate the wash-sale rule. If that does happen, you may end up paying more taxes for the year than you anticipated. So when in doubt, consult with a tax professional.

What is the wash sale loophole? ›

The simplest way to bypass the rule is to wait 30 days after selling an asset and then before buying back. The IRS wash sale rule declares that if a trader sells a security at a loss and then repurchases within 30 days, the initial loss cannot be claimed for tax purposes.

Why are capital losses limited to $3,000? ›

The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated.

How long does a wash sale last? ›

Keep in mind that the wash sale rule goes into effect 30 days before and after the sale, so you have a 61-day window to avoid buying the same stock. Alternatively, if waiting 61 days isn't feasible, you can purchase a security that is not substantially identical to the one you recently sold.

Do brokers report wash sales to the IRS? ›

The IRS requires brokers such as E*TRADE to track and report wash sales that involve stocks, bonds, and most other common securities when “covered” by the IRS's cost basis reporting rules (called "covered securities") if they occur within a single account.

What is the IRS code for wash sale? ›

26 U.S. Code § 1091 - Loss from wash sales of stock or securities.

Can I sell a stock and buy it back the same day? ›

Retail investors can buy and sell stock on the same day—as long as they don't break FINRA's PDT rule, adopted to discourage excessive trading.

Can I sell stock and reinvest without paying capital gains? ›

With some investments, you can reinvest proceeds to avoid capital gains, but for stock owned in regular taxable accounts, no such provision applies, and you'll pay capital gains taxes according to how long you held your investment.

When can I sell without penalty for a wash sale? ›

More specifically, the wash-sale rule states that the tax loss will be disallowed if you buy the same security, a contract or option to buy the security, or a "substantially identical" security, within 30 days before or after the date you sold the loss-generating investment (it's a 61-day window).

How do option traders avoid wash sales? ›

One strategy for avoiding wash sales in options trading is to trade different expiration dates or strike prices. For example, if an investor sells a call option and then buys a put option with the same expiration date and strike price, this would likely trigger a wash sale.

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