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Answer:
Dear
BuyandHolder,
It
all depends on the timing and how committed you are
to declaring a tax loss. I recommend that you review
this situation with your tax preparer. To help you
do so, here are the relevant facts.
If
you sell a stock that's gone down in price since you
purchased it and then buy back shares of the same
stock within 30 days of the sale, the IRS does
not allow you to deduct your loss. This particular
type of trade is officially known as a "wash sale."
In
other words, the loss cannot be deducted in the year
of the trade. The loss can only be declared when you
sell the new, replacement shares.
In
the eyes of the IRS, if you sold and bought back the
same stock within 30 days, you did so only in order
to claim a loss on your tax return -- and you did
so without completely letting go of the stock. In
other words, the IRS maintains that you're only pretending
to sell the stock to get a tax break.
Here's
an example of how this ruling works:
You
bought a stock for $16,000. It drops in value to $10,000.
You sell. Your loss is $6,000. The stock starts to
go up in price. Fifteen days later you buy it back
for $7,000. You cannot deduct your $6,000 loss because
you sold and repurchased shares of the same company
within a 30-day period. Your $6,000 loss is added
to the $7,000 you paid for the new shares to determine
the cost you must use to calculate any gain or loss
when you sell the new shares. In this example that
amount is $13,000.
Note:
Although you did not mention it, I thought you should
know that commodity futures contracts and foreign
currency transactions are not subject to the wash
sale rule.
Two
Possible Solutions
There
are several ways to handle this situation that will
protect your portfolio and at the same time avoid
a wash sale.
(1)
Sell your stock and wait for 31 days and then buy
the same security again.
(2)
Sell your stock and within 30 days and buy stock in
a different company but one that is in the same industry
and that is starting to perform well.
Good
luck and Happy New Year!
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