Booyah Breakdown: Tax Twists

The rules say the stocks of two merger partners are not substantially identical as long as there's a contingency that still has to be satisfied before the merger goes through. The yardstick here: Any trades made prior to shareholders' approval of the merger should be safe.

On the options front, the IRS has never actually opined on when one option is substantially identical to another. So we must go with conventional wisdom. That said, as long as you vary the expiration date, you're okay. To be even safer, buy options with different strike and expiration dates.

As far as other investments, it's pretty difficult to flunk the wash-sale test with mutual funds. Unless you buy back the same shares in the fund you just sold, it's almost impossible for one fund to be substantially identical to another. So you're effectively immune.

And remember, if you trade in your IRA, 401(k) or any other tax-deferred account, you don't have to worry about the wash sale. And in most circumstances, you can sell a stock in your taxable account and buy it back in your tax-deferred account without the wash sale rearing its nasty head.

Double Dipping

We've already gone over how to avoid the wash-sale rule by buying similar companies or a company's merger partners. But what if you really want to keep that stock?

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