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
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV