Watch out for the Wash Sale Rule
I own a stock whose price has dropped quite a bit since I bought it a few years ago, but I'm holding out hope that the company will eventually turn around and the stock will rebound. I'm also looking at my tax situation for the year, though, and would love to benefit from the loss on my taxes. If I sell the stock now and write off the loss on my 2006 taxes, how long do I have to wait before I can buy the stock back again?
This is a great time of year to look through your investments to see if you can lower your tax bill before year-end by selling some losing stocks. You generally can use your losses to offset any capital gains you have for the year, and then you can use up to $3,000 of any additional losses to lower your income (with any extra losses rolling over to help with next year's tax bill). See Use Losses to Offset Gains for more information.
But you're right that there are special rules if you want to buy the stock back again. Under the "wash sale" rule, you can't deduct the loss if you buy the same stock within 30 days before or after you sell it. If you think the stock will eventually rebound, it's a good idea to keep an eye on your calendar before buying it back.
If you do buy the stock back within 30 days, though, you don't lose the loss forever. A loss denied by the wash sale rule is added to the cost basis of the newly purchased shares. That will lower your tax bill when you finally sell the new shares. For example, suppose you bought 100 shares of Big Stock for $1,000 and sold them for $750. Less than 30 days later, you think Big Stock is poised for a takeoff, and you can't wait any longer to buy 100 shares at $800. You can't deduct the $250 loss in the year of the wash sale, but you can add it to your basis. When you finally sell Big Stock, your gain or loss will be calculated from $1,050 ($800 plus $250).
Got a question? Ask Kim at email@example.com.