TAXES
To: Rainier Trinidad (531 )
From: dave horne
Sunday, Mar 29 1998 6:20PM ET
Reply # of 922
Hi Rainier, one valuable lesson I've learned in the last week, as I'm doing my taxes, is
that I've been entirely too paranoid of wash sales. Often times I will buy a breakout on
the breakout day, and end up selling a day or 2 later because the breakout proved to be
false. Many times, 2 or 3 weeks later, a "real" breakout with followthru happens, but I
don't act on it because of the "wash sale" fear.
For whatever reason, I had the impression that if you have a trade where the wash sale
rule applies, you lose the ability to deduct that loss on your taxes. Ever.
So, I had always made sure I didn't enter into a "wash sale" trade...until this year when
the loss deduction for a particular trade was so small that I said what the heck, and
made another opening purchase within 30 days of the wash sale.
Now that I have one and need to account for in on my taxes, I've found that I was
worried about nothing. The wash sale rule merely POSTPONES the ability to write off
the loss until the position is completely closed out (which may mean you no longer have
a loss). If this is all done within 1 tax year, you don't even need to note it as a wash sale
on schedule D. The loss incurred when the wash sale happened is just added to the cost
basis of the position that was opened within 30 days of the wash sale date. You even
get to add together the holding periods for the chained transactions (although that
doesn't really matter if you closed the position in the same tax year). Too Fair!!! I can't
tell you how many times a false breakout happened, followed in less than 30 days by a
real breakout, but I didn't open a new position for fear of losing my loss deduction.
I just watched it take off and go up from the sidelines.
The moral of the story is that I am now more convinced than ever that (for me anyway)
I have to COMPLETELY IGNORE the tax consequences of my trades. Considering
the tax consequences puts a constraint on the trade that is TOTALLY uncorrelated to
the performance of the trade. Entry/exit decisions should only be made based on
information that is correlated to the investment's performance (i.e. TA, FA, broad
market conditions, company news, etc). My tax consequences (and commissions for
that matter) have no influence whatsoever on whether a stock sinks or swims. They
aren't a part of the overall strategy, so using their influence to go against my overall
strategy means I'm not sticking to my strategy.
NOTE: I do not claim that ignoring tax consequences and commissions is proper for
everyone (or even the majority). Everybody's situation is a little different. |
