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Technology Stocks : America On-Line: will it survive ...? -- Ignore unavailable to you. Want to Upgrade?

To: Cosmo Daisey who wrote (12958)	12/23/1998 12:00:00 PM
From: Dr. D	Read Replies (1) \| Respond to of 13594

OFF TOPIC Cosmo The wash rule means you cannot take the loss in the current tax year unless you sell again and are out for 30 days Your explanation is as clear as mud ! The following is how it was explained to me. However this explanation is a little muddy as well. Perhaps we can figure out exactly how it works. I really want to completely understand the rule. This was copied from the Dell thread earlier this year. Washout Sale Some clarity on WASH SALE... Seems like people are making this more confusing then it really is. It's called a wash sale because in a sense that is really what it is doing. Washing your losses away onto this years taxes...yet you still own the security. A simple example: You buy 1000 shares of xyz @ $100. on Jan 2nd 1998 (or anytime after the start of the new tax year ie Jan 1st) Ok lets say XYZ has a hard time and it drops to $50 by Dec 1998. You have a $5000 unrealized loss! Ok, lets say you have had a good year but, you want to lower your taxable income with this loss that could have if you sold. So let's say you sell XYZ on or before dec 31 and you have the $5000 loss to put on schd D. Of course you still think XYZ is a good long term holding so you buy it back right away @50 (actually it doesnt matter what you buy it back at) Now you are long again 1000 XYZ. And you have a realized $5000 loss to put on your taxes! Bingo right? WRONG! The IRS looks at it like you still own the same property and you just "WASHED" out a loss to put on your taxes. So they will not allow you to claim that loss. (the loss is not forever gone, it will simply be netted out of what you eventually gain or loss on the next sale of XYZ) It's unfair yes I know. Ok here is where the 30 day stuff comes into play. If you wait 30 (so if you bought on the 31st day) days after you sold XYZ you could re-buy it back and take the new long position with having to worry about the WASH sale rule. However not all is lost, the IRS will let you buy a similar stock in the industry or any other stock for the time being, until that 30 days is up with out the wash sale rule going into effect. The wash sale rule also works 30 days BEFORE. So if you were to buy a 2nd lot of 1000 XYZ 30 days before you sold your first lot of 1000 xyz the IRS would say that you own the same property and that you are net net 1000 xyz and have the $5000 realized loss to put on your taxes. One sneaky thing you could do is...after you have sold for a loss to put on your taxes you could then re buy the same position and then sell at a small gain and that would take away the effect of the WASH Sale and then you would just re buy again to go for the long haul and since your last trade was a gain you would not have to worry about the WASH sale rule! So basically its like this...if you are going to take a loss but re initiate the same position in the same stock, 30 days before or after you sell, you will come into the wash sale rule. Because you own the same stock or property but you have a loss in it. You just have to think about it a little. Again you can trade in and out of XYZ as many times as you want but if the last trade you do is a loss and you go back in long with in 30 days before or after and you do not close that position by the end of the year you will be hit with the wash sale rule.