Personal Finance

Monday, November 2, 2015

Learn how to limit the impact of the wash sale rule

Senior Estate Planner, Mike Repak, discusses various techniques to navigate around the wash sale rule.



Considering the turmoil within the markets recently, it’s probably a good idea to review the wash sale rule. Of course, experienced investors know the effect of this rule is to disallow tax losses where someone sells an investment at a loss, and within 30 days before or after, acquires a “substantially identical” investment or an option to acquire same. Since investors frequently want to harvest tax losses without giving up on the eventual run-up in an investment, the limits of the wash sale rule are useful to keep in mind for those people who would rather not risk being completely out of an investment for 30 days.

A few techniques may be available to limit the impact of the wash sale rule. Investors should review the advisability of these approaches with their own tax advisor to see how they could benefit their unique situation. Taking a reporting position in the “gray area” of tax law requires an assessment of each investor’s appetite for tax risk. However, investors may wish to keep a few points in mind as they look to harvest losses in the approach to year-end.

Trading in more than one account will greatly increase the chances that losses will be reported incorrectly on an investor’s tax return. Regulations require broker’s to identify wash sales that occur within a single account, but the taxpayer is solely responsible to keep track of this information where the trading occurs in different accounts. An instance where wash sales are reported incorrectly because multiple accounts are involved, could, if detected on audit, result in an assessment for underpayment of taxes, interest, and possibly a negligence penalty.

An investor can safely replace a stock that’s been sold at a loss with a different but correlated investment. This solution is weak since even correlated investments might move unpredictably over a 30-day period.

Another safe approach would be for an investor with two loss positions to sell one of them, take the proceeds from the sale, and invest more in the other loss position. After 31 days, the older shares in the second stock could be sold (using specific lot identification) and the position in the first stock could be reestablished.

In the case of a fund, an index fund could be replaced with a managed fund safely. It’s a closer case if one index fund is replaced with another. A safer approach would be to replace an index fund with a basket of funds.

Although it’s clear that the wash sale rule would disallow a loss if an investor sold a stock and either bought a call or sold an “in the money” put within 30 days. However, it’s arguable that if an investor sold an option on a stock at a loss and replaced it with the stock itself, the language of the wash sale rule might not apply.

Investors holding investments that have declined in value may want to consult with their Janney Financial Advisor about strategies to allow them to harvest the losses for tax purposes which minimize the risk of being on the sidelines for the period required to satisfy the wash sale rule.

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Michael Repak
Vice President/Senior Estate Planner
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Mike provides advice and guidance in all aspects of financial, tax, and estate planning issues. He earned his Bachelor’s degree from William Paterson University in Wayne, New Jersey, and has a Master’s degree from the University of Wisconsin in Madison, Wisconsin. He has a CPA/PFS credential, and Series 7 and 66 securities licenses. He received his J.D. from the University of Florida and his LL.M. in Tax Law from NYU. 

He has been an adjunct professor in the MBA program at Temple University and is a sought-after speaker for professional conferences and events. He is also frequently featured as a Money Doctor on www.360financialliteracy.org, the public education site of the American Institute of Certified Public Accountants. Mr. Repak has served on several non-profit and civic boards, is a graduate of Leadership Philadelphia, and a member of the Union League of Philadelphia.


Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any taxrelated statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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