More Wash-Sale Matters for the Tax Nerds

What a bunch of tax nerds you all are.

There's been a remarkable bit of reader interest in various aspects of the wash-sale rule, so let's address the basics first, and then I'll answer a few reader questions.

The wash-sale rule prevents taxpayers from claiming a loss on securities if the exact same ("substantially identical" in tax parlance) securities are purchased within 30 days of the sale -- either before or after the sale, making it a 61-day period. In other words, if you sell 100 shares of Microsoft(MSFT) at a loss on March 30, but also buy 100 shares either 30 days before the sale or within 30 days after, the Internal Revenue Service won't allow you to claim the loss on that sale. The loss is really disallowed only temporarily -- the basis of the new shares is adjusted to reflect the money lost in the sale, so the loss is accounted for when the new shares are sold.

Put and call options are also covered under the wash-sale rule, so you won't be able to claim a loss on securities you've hedged with options within 30 days (on either side) of the sale.

The same goes for shares in a mutual fund -- if you incur a loss when redeeming shares, but also purchase new shares in the same fund within 30 days of the redemption, the loss will be disallowed. And yes, that includes reinvested dividends. If the distribution is reinvested, you're technically purchasing more shares, even if it's a part of an automatic program. The allocable loss is disallowed, even though the wash-sale rule was inadvertently triggered. As with stocks, the disallowed loss on fund shares is added to the cost basis of the replacement shares and will affect the computation of the gain or loss when those shares are eventually sold.