This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Ask Bev: Looking at Wash Sales, Covered Calls

Understanding tax law requires the patience of a Talmudic scholar. But one aspect in particular seems to give readers a crisis of faith unsurpassed by any religious experience -- the "wash-sale" rule.

The wash-sale rule governs the purchase and sale of different lots of the same security -- it's when you buy one lot and sell another within the next 30 days, or sell one lot and buy another within 30 days. Under the rule, if the wash sale results in a capital loss, the Internal Revenue Service won't allow you to claim that loss as a deduction. Rather, you'd add the amount of the loss to your basis in the new shares. So the benefit isn't lost, only delayed. The increased basis in the new shares ensures that you'll either owe tax on less of a gain or will be able to claim a larger loss when you eventually sell those shares.

Technically, the wash sale prevents you from claiming a loss on a security if a "substantially identical" security was purchased in that 61-day window. So if you sell 100 shares of Cisco (CSCO) at a loss but then three weeks later repurchase another 100 shares, you'll have to adjust the basis of the new shares to reflect the loss incurred in the sale, rather than being able to use it to offset gains you may have reaped in other areas of your portfolio. The "substantially identical" stipulation, though, means that it's not just buying new shares of Cisco that will trigger the wash-sale rule, but also contracts or options to buy Cisco.

In practice, the wash-sale rule has inspired more reader mail than any other subject this column has tackled. For more background, click here , here , here and here .

Beverly,

I have modest very long-term holdings in several direct dividend reinvestment programs, e.g. Johnson & Johnson (JNJ - Get Report). If I buy 100 shares of JNJ today through my brokerage account, and sell it at a loss on Feb. 17, does the wash-sale rule come into play by virtue of the small dividend received and reinvested automatically in the interim?

Thanks,

Doug D.

1 of 4

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Submit an article to us!
SYM TRADE IT LAST %CHG
JNJ $100.13 0.00%
MSFT $48.66 0.00%
AAPL $128.95 0.00%
FB $78.99 0.00%
GOOG $537.90 0.00%

Markets

DOW 18,024.06 +183.54 1.03%
S&P 500 2,108.29 +22.78 1.09%
NASDAQ 5,005.3910 +63.9670 1.29%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs