Booyah Breakdown: Tax Twists

The wash-sale rule applies this concept to securities. If you buy a stock, sell it at a loss and then buy it back, on paper you're in the exact position you started. You're still holding the same stock that you started out with.

The problem is you generated a tax loss in the process. And the government doesn't think you should be able to deduct that loss on your tax return if you haven't really altered your position.

The official jargon in the tax code says that if you sell a security at a loss, you can't deduct the loss on your tax return if you acquired a "substantially identical" security 30 days before or after the sale. Translation: If you buy a stock on Monday and sell it at a loss on Tuesday, the wash sale rule says you can't claim that loss on your tax return if you buy back the same stock within 30 days.

Of course, if you just can't wait 30 days to buy the shares back, there is a way to claim the loss: You can add the loss to the basis of the repurchased security.

Let's say you buy a share at $10, sell it at $5, and buy it back within 30 days at $6. You can add the original $5 loss to your new cost basis, which is now $11 ($6 + $5). If the stock rises and then you sell, let's say at $12, your taxable gain is only $1. So by repurchasing before the 30 days are up, you've cut into your upside potential.