As a day trader, you’ve probably have heard about the popular 30-day stock trading rule also known as a Wash Sale.
But if not, don’t worry because you’re in the right place. In this comprehensive guide, we will help you understand what the Wash Sale Rule is and what constitutes this rule.
What Is The 30 Day Stock Trading Rule?
Simply put, it’s where an investor sells losing security and then repurchases the same within 30 days of the sale. The repurchase may also include buying another substantially identical security.
Basically, this rule is an investment strategy used by investors to help them maximize their tax benefits for a given year.
So, implemented by the IRS, the rule prohibits investors from claiming a capital loss deduction on their income tax returns. Essentially, a capital loss is when you sell a stock at a loss and it can be used to reduce your taxable income.
But here is the best part; a Wash Sale can take place at any time during the year. However, this rule does not apply when stocks, bonds, or options are sold at a profit.
What Constitutes a Wash Sale?
There are so many factors that the IRS considers before deciding whether a certain investment qualifies as a wash sale. These include:
- Purchase of the same or a substantially identical losing security
- Buying substantially identical security but in a complete taxable transaction
- Purchase of another substantially identical security for a retirement account
- Buying an option or a contract in order to purchase a substantially identical security
Additionally, the rule also applies if you sell a stock and a corporation you control or your spouse buys the substantially identical stock.
When The Rule Does Not Apply?
The rule may not apply if you buy back stocks in a different account. For instance, if you sell the securities out of your regular brokerage account and repurchase the shares in a joint account. While such a transaction would qualify to be a Wash Sale, the tax loss is not allowed.
Additionally, this rule does not apply to profits or gains of a sale. So, if you sell a stock for a gain and purchase it right back, you’ll still owe taxes on the profit.
How To Calculate the Wash Sales?
If you’re new to day trading, you might find calculating Wash Sales to be a somewhat complicated. However, the IRS requires investors to record each wash sale they make throughout the tax year.
To start with, you need to identify all the trades that you closed at a loss. Next, find out if you repurchased the same securities or substantially the same within the 30-day window.
The next step should be to record a Wash Sale adjustment line on your Schedule D. You’re also required to adjust the cost basis of the repurchase of shares. This involves moving the loss either forward or backward to whichever trade triggered the Wash Sale.
Sounds complicated? Well, it is not but the entire process can be tedious. However, it may get more complicated especially if you do not repurchase an equal number of shares.
If you must try day trading, there are various critical taxation regulations that you need to understand. The 30-day stock trading rule is one of them as it will have a big impact on your final profitability. So, we hope that this article has helped you understand what the Wash Sale Rule is all about.