Gain received on the sale of capital assets are taxed at special rates or ordinary rates based on the holding period of the said asset. However important tax planning which was done by taxpayers was to sell the security for loss and buy it back again, this creates capital loss and it can offset the Capital gain on the sale of other securities. They simply do a stock swap that is sale and buy back again same or substantially identical security shortly before or after.
This strategy is called tax-loss harvesting, and it can be applied under certain circumstances which will lower your taxes. This tax deduction strategy might seem appealing, but IRS has implemented the WASH SALE LOSS Rule which doesn’t allow such manipulation.
The Wash Sale Loss Rule prevents traders from realizing a tax loss on a position that the taxpayer reacquires within 30 days after (or before) selling a security. Note that though losses on wash sales are not deductible, gains are taxable. Let have a look at an example to understand the same.
Assume Mr. X purchased 100 shares of stock in ABC Corporation for $1,000 in 2015. On 28th December 2020, Mr. X sold the 100 shares acquired in 2015 for $600. Mr. X generated Capital Loss of $400 in year 2020. On 4th January 2021 Mr X. Repurchased shares of ABC Corp at $650. Since a purchase of substantially identical securities occurred within 30 days of sale, the loss of $400 on 28th December 2020 sale cannot be deducted. Instead, the basis of the shares acquired on 4th January 20201 is increased by $50 to $1050.
Another important point to note is that if you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
Wash Sale on Crypto-Currency
Crypto Currencies are taxed in same way as other shares however wash sale loss rules doesn’t apply on Crypto Currencies transactions. This creates a loophole that is very little known and it may allow you to complete a wash sale and claim loss on sale of Crypto-Currency.
This loophole allows us to plan and save taxes for the year 2021. IRS may come up with some new rules to close this loophole, but until then it’s a great area of Tax planning for everyone.
Wash Sale on Options and Future Contracts
The wash sale rules applies to contracts and options to acquire or sell stock or securities it does not apply to sales or trades of commodity futures contracts and foreign currencies.
Wash Sale on Warrants
The wash sale rules apply if you sell common stock at a loss and, at the same time, buy warrants for common stock of the same corporation. But if you sell warrants at a loss and, at the same time, buy common stock in the same corporation, the wash sale rules apply only if the warrants and stock are considered substantially identical.
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