Ugh, it was hard to take the loss on XYZ. You nurtured it, coddled it, tried to think positive, begged for it to turn around and come in for you. But it didn't happen. So at the end of the tax year, you sold it, to harvest the loss against some other winner in your portfolio. But seller's remorse has hit. You wake up, 4 a.m., for days on end. You still believe XYZ might be a well-disguised winner. Those thoughts are reinforced by the usual year-end "January effect" commentary: This year's losers, sold off and further depressed, are destined to become January's bargains. Like a longtime significant other, you can't let go completely. You feel the urge to buy back ASAP. But the so-called wash sale rule jeopardizes the tax loss for which you sold the stock, raining on that parade. There might be a way out. But first, a refresher on wash sales. The idea of the wash sale rule is to keep investors from harvesting tax losses, thereby depleting the U.S. Treasury, only to come away unchanged thereafter. Even though you're more likely to pay taxes on later gains, as your basis on repurchased securities is lower, the Congress and the IRS don't like that timing proposition. Oh, well. Straight from IRS Publication 550 -- Sales or Trades of Investment Property, here's the IRS take . A wash sale occurs when you sell or trade stock or securities at a loss, and within 30 days before or after the sale you:
Buy substantially identical stock or securities
Acquire substantially identical stock or securities in a fully taxable trade, or
Acquire a contract or option to buy substantially identical stock or securities
If you sell stock and your spouse or if a corporation you control buys substantially identical stock, you also have a wash sale. So you can't repurchase the shares you sold within 30 days. And you can't buy something "substantially identical," you can't have your spouse buy it back (or your company), and you can't buy a "contract or option" to buy such substantially identical securities. What can you do? Some may skate close to the law by buying an option expiring further out than 30 days. So-called LEAPs, or long-term equity anticipation securities, which may expire several months to a couple of years down the road, come to mind. (We're talking specifically about buying call options; that is, the option to buy shares at a specified price on or before a specified expiration date.) I've seen articles suggesting that buying LEAPs is OK, perhaps because the expiration date lags the 30-day window. I'm not so sure I'd take this chance, so here's my play. Click here for the video version of this story from Jennifer Openshaw.