Trader Tip
How to Avoid Wash Sales
While the wash sale rule has most often been seen for individual securities such as stocks and bonds, it does come into play with mutual funds as well.
If a security is sold at a loss, investors may want to write that loss off against capital gains and possibly a small portion of ordinary income.
However, capital losses may not be used to offset gains or income if the investor sells a security at a loss and purchases the same or a substantially identical security within 30 days before or after the trade date.
The sale at a loss and the repurchase within this period is a wash sale.
The rule disallows the loss or tax benefit from selling a security and repurchasing the security (or one substantially identical to it) in this manner.
The term substantially identical refers to any other security with the same investment performance likelihood as the one being sold.
Examples are:
\- securities convertible into the one being sold,
\- warrants to purchase the security being sold,
\- rights to purchase the security being sold, and
\- call options to purchase the security being sold.
31st -----------------SELL ------------------31st
DAY <--------------- @ -------------------> DAY
OK <---------------- LOSS ------------------> OK
Unlike many other types of securities, the IRS has not given clear guidelines about what would be viewed as substantially identical if a mutual fund is sold and another mutual fund is purchased within the wash sale window.
For example, if trying to avoid the wash sale, one would not sell an index mutual fund from one fund company and buy another index fund tracking the same stock index from another mutual fund company.
The following transactions should not trigger a wash sale:
\- Selling an index fund and buying an actively managed fun
\- Selling an actively managed fund and buying an index fund
\- Selling an index fund and buying an index fund tracking a different stock index
\- Selling an actively managed fund and buying a fund managed by a different fund company and manager
The wash sale rule covers 30 days before and after the trade date.
Including the trade date, this is a total time period of 61 days.
TLDR: HODL.
While the wash sale rule has most often been seen for individual securities such as stocks and bonds, it does come into play with mutual funds as well.
If a security is sold at a loss, investors may want to write that loss off against capital gains and possibly a small portion of ordinary income.
However, capital losses may not be used to offset gains or income if the investor sells a security at a loss and purchases the same or a substantially identical security within 30 days before or after the trade date.
The sale at a loss and the repurchase within this period is a wash sale.
The rule disallows the loss or tax benefit from selling a security and repurchasing the security (or one substantially identical to it) in this manner.
The term substantially identical refers to any other security with the same investment performance likelihood as the one being sold.
Examples are:
\- securities convertible into the one being sold,
\- warrants to purchase the security being sold,
\- rights to purchase the security being sold, and
\- call options to purchase the security being sold.
31st -----------------SELL ------------------31st
DAY <--------------- @ -------------------> DAY
OK <---------------- LOSS ------------------> OK
Unlike many other types of securities, the IRS has not given clear guidelines about what would be viewed as substantially identical if a mutual fund is sold and another mutual fund is purchased within the wash sale window.
For example, if trying to avoid the wash sale, one would not sell an index mutual fund from one fund company and buy another index fund tracking the same stock index from another mutual fund company.
The following transactions should not trigger a wash sale:
\- Selling an index fund and buying an actively managed fun
\- Selling an actively managed fund and buying an index fund
\- Selling an index fund and buying an index fund tracking a different stock index
\- Selling an actively managed fund and buying a fund managed by a different fund company and manager
The wash sale rule covers 30 days before and after the trade date.
Including the trade date, this is a total time period of 61 days.
TLDR: HODL.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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