Understanding Wash Sales Rules When Reporting To The IRS

Understanding Wash Sales Rules When Reporting To The IRS

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Investors understand very clearly what wash sales are, but it may be a term that is unfamiliar to other individuals. These transactions occur when an investor sells a security at a loss and then repurchases the same or similar security within thirty days of the original sale. The IRS has very specific and sometimes confusing rules regarding these transactions.

Here is a common scenario. Jane Doe has five thousand shares of Johnson Company that she gets rid of on May first. She shows a loss of one thousand dollars on the transaction. On May sixth, she buys five thousand shares of Johnson Company and then turns around and sells it at a profit of one thousand dollars.

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Ms. Doe is going to try to get a tax break on the one thousand dollar loss she experienced in the first sale. This is an effort to counterbalance the taxes she will owe on the profit she earned with the second sale.

Since Mr. Smith sold and then repurchased his shares within a 30 day time period, the IRS will say that his position with Global Oil remained in place. They will expect him to pay all the taxes he owes on the seventy-five thousand dollar profit he made with the second sale.

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Although people buy and sell shares all the time and often deduct any losses they suffer, there is a thirty day rule. It is against the law to deduct losses for these transactions. You cannot deduct losses that occur when you sell shares in a company and then repurchase them, or similar ones, within 30 days.

Wash sales can be very complex and confusing to amateur investors. The IRS has developed rules and regulations calculated to thwart unscrupulous traders from taking advantage of the tax laws currently in effect. Individuals hoping to take advantage of these selling and buying techniques should take note.

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Many day traders struggle to properly report their gains and losses to the IRS each year. The multitude of regulations to be followed and forms to be filled out can be quite overwhelming. And of course you should avoid filing late! If you would like assistance with the process, or need online info, give TradeLog a try. They offer software to help with schedule D tax forms and much more.

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