When Lucy first saw those black and tan Jimmy Choo heels she knew she needed them. “They would look so cute with my new purse,” she thought. Without hesitation, she found her size, whipped out her credit card, and bought them on the spot. Once Lucy got home, she immediately tried on her new heels. She then sat back on her couch for a little bit thinking about her purchase. “These are so pretty! Wait…did I really just spend $1500 on these? That’s a whole month worth of rent! I need to return these, I can’t afford them and my rent this month!”
Lucy is no different than the rest of us; we’ve all been there, buyer’s remorse! It’s very common to buy something, especially on impulse, and regret it later. But is there such thing as seller’s remorse? There sure is; I’m sure you can think of a time when you sold something only to wish you could have it back.
A wash sale is an IRS rule that prevents a seller of a security from repurchasing substantially identical securities within 30 days of the original sale or trade. This can also happen if the seller’s spouse or company buys substantially identical stock or securities within that 30 day period.
Lucy buys 100 shares of Microsoft at $40/share on January 1st. On May 1st she sells her shares at $32/share for a loss of $8/share or $800. On May 28th she reads an article about Microsoft and decides she wants to buy Microsoft again. She purchases 100 shares at $35 per share on May 28th. The IRS does not allow her to take the loss on the $800 but does allow her to add that amount into her basis of the stock. This brings the basis of her stock up to $43/share.
This may look bad to you but there is a silver lining. Since the IRS doesn’t allow Lucy to take the $800 loss right now, they will add it back into her stock and allow her to take it later, when she sells the stock. If, later in the year, the stock price goes up to $45/share Lucy only gets $200 if she sells. However, if the stock drops down to $40/share, instead of only having a $300 loss on her tax return she will have a $1100 loss.
The reason the IRS has this wash sale rule is to prevent taxpayers from taking advantage of losses. Without the rule, if Lucy sold her stock at $32/share on December 31st she would have been able to take advantage of an $800 loss on her return. If, on January 1st she bought back the stock at $32/share and it went up to $42/share she essentially made $1000 in the next year and wouldn’t have to worry about the taxes for a whole year. This rule prevents this from happening.
We work with a lot of clients both individuals and corporations that engage in transactions of stocks and other securities.
If you are a new company and need help determining if issuing securities or debt instrument is a good idea, contact us we have plenty of experience.
If you are an individual and need tax advice regarding securities and your tax return we have a team that can help!
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