The wash sale rule was created to deter investors from selling securities at a loss in order to collect a tax benefit. A wash sale happens when and if someone sells a security at a loss and then purchases the same security within a 30-day period before or after the sale.
Investments that are subject to wash sale rules are stocks, mutual funds, ETFs, or anything you would take a loss for in the previous year. There are a few things that can be done in order to avoid a wash sale adjustment. Here are two to consider:
Tip #1: Look for unrealized gains or losses of the positions in your portfolio toward the end of the year. It’s important to pay close attention to capital gains that are typically paid out in November or December. If there are losses, especially big losses, it could be advantageous to sell out of a position to take the losses and avoid capital gain. Then, be sure to wait 30 days to buy back into those funds or the loss you generated could be disallowed and negated.
Tip #2: In order to avoid a wash sale but also remain in the market for those 30 days, you can swap into a similar or like security. At Fort Pitt we use this technique with our mutual fund portfolios. For example, we will sell a mutual fund in a taxable account and buy an ETF, which gets market exposure and avoids having cash just sitting in those accounts. The same strategy can be used with individual securities.
This type of attention to detail and strategy we use at Fort Pitt is unique and sets us apart from a lot of our competitors. It is a big task to go through every holding for every client account but we are happy to provide this added benefit for our clients.
In conclusion, it’s important to consider the tax consequences and penalties in investing decisions and you should always feel free to ask your financial advisor, accountant, or tax professional if you have any questions about potential tax penalties.
Fort Pitt does not provide tax advice. We encourage you to contact your tax professional with any questions.