Understanding Wash Sales Rules Before Reporting To The IRS

For people who buy and sell securities every day, the IRS rules regarding wash sales can be complicated. Not complying with those rules is very risky. Less experienced investors may be unfamiliar with the term wash sales. These transactions happen when someone sells securities at a loss and then, within 30 days, buys them back, or buys very similar securities.

It may be helpful to give an example of this type of transaction. John Doe owns ten thousand shares of Smith and Company which he sells on January twelfth for a loss of five thousand dollars. He turns around on January twentieth and repurchases ten thousand shares which he sells for a profit of ten thousand dollars.

Ms. Doe is going to try to get a tax break on the one thousand dollar loss she experienced in the first sale. This is an effort to counterbalance the taxes she will owe on the profit she earned with the second sale.

The IRS says no. Since Mr. Doe repurchased the same securities within thirty days of the first sale, the IRS will tax him on the entire ten thousand dollar profit. Mr. Doe’s position in the security never really changed in the eyes of the IRS.

It is illegal to try to take a tax deduction on losses that occur with these transactions. Investment losses are generally tax deductible, but selling securities at a loss and then buying them back again within thirty days and trying to claim a tax loss is considered tax evasion. This is called the thirty day rule.

Wash sales can be very complex and confusing to amateur investors. The IRS has developed rules and regulations calculated to thwart unscrupulous traders from taking advantage of the tax laws currently in effect. Individuals hoping to take advantage of these selling and buying techniques should take note.

Many day traders struggle to properly report their taxable profits to the IRS every year. The vast amount of rules to be followed and forms to be filled out can be quite overwhelming. And of course you should avoid filing late! If you would like assistance with the process, or need online info, give TradeLog a try. They offer software with a wash sale calculator and much more.