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Hi all,

Can someone please explain me this? If the wash rule applies for 30 days, then does that mean that daytrader can not deduct their loss if they bought within 30 days of their sell? If so that's true, how could you ever make money for DayTrading? Your losses are not deductible, and your gains are taxed against you.

Thanks
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This Regulation was developed to deter an individual taxpayer from selling a security, incurring a capital loss then repurchasing the security for the same amount. Essentially the individual will get a tax benefit from lowering their basis in a security. You are allowed to buy and sell the same security throughout the year, but you must wait at least 30 days from year end to repurchase the same stock.
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Can someone please explain me this? If the wash rule applies for 30 days, then does that mean that daytrader can not deduct their loss if they bought within 30 days
of their sell? If so that's true, how could you ever make money for DayTrading? Your losses are not deductible, and your gains are taxed against you.


I was looking up another question about wash sales and I found this column that applies to your question http://www.fool.com/taxes/2000/taxes001006.htm I basically says that you can trade all you want during the year and if you close your position before the end of the year and stay out for the required 30 days after the sale, then you can claim the loss. I hope this helps.

prime13
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I pulled this from the US Code. I'm not sure whether Day Traders would fit into the "dealers in securities" category, but they would more than likely incurr these losses in the "ordinary course of business. Can anyone clarify this.


United States Code
Sec. 1091. Loss from wash sales of stock or securities

-STATUTE-
(a) Disallowance of loss deduction
In the case of any loss claimed to have been sustained from any
sale or other disposition of shares of stock or securities where it
appears that, within a period beginning 30 days before the date of
such sale or disposition and ending 30 days after such date, the
taxpayer has acquired (by purchase or by an exchange on which the
entire amount of gain or loss was recognized by law), or has
entered into a contract or option so to acquire, substantially
identical stock or securities, then no deduction shall be allowed
under section 165 unless the taxpayer is a dealer in stock or
securities and the loss is sustained in a transaction made in the
ordinary course of such business. For purposes of this section,
the term 'stock or securities' shall, except as provided in
regulations, include contracts or options to acquire or sell stock
or securities.

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Thanks Prime13. That article clarifies a lot. The fool should put that article on the FAQ.

JC
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<<If the wash rule applies for 30 days, then does that mean that daytrader can not deduct their loss if they bought within 30 days of their sell? If so that's true, how could you ever make money for DayTrading? Your losses are not deductible, and your gains are taxed against you.>>

But think about this for a second...daytraders generally get out of their positions entirely in a short period of time. Minutes. Days. Perhaps weeks. It's only near the end of the year that true daytraders have to be careful of the wash sale rules...when any open transactions might bridge two tax years.

As pointed out in my article on this very subject in the Taxes FAQ area, the wash sale rules become completely moot if the position is closed out sometime during the year, and no "replacement" shares are purchased either 30 days before or after the last loss sale.

So, for example, say you purchase 100 shares of XYZ company on January 10th for $50/share. January 20th, you sell those shares for $30/share. Then on February you repurchase 100 shares of XYZ for $25/share.

That's a wash sale.

But on April 10th, you sell your 100 shares of XYZ for $20/share. And you stay out of the stock within the required 30 day period before or after the loss sale.

Do you STILL have a wash sale? Sure. Is it important? Nope...not now. The wash sale rules have become moot. Simply report your purchases and sales as you normally would. Your ultimate loss would be the same computing the buys and sells the normal way and making the basis adjustments as the wash sale rules requires.

So the key is to not let any wash sales bridge two tax years. If you can avoid that, the wash sale rules actually become moot.

TMF Taxes
Roy

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So the key is to not let any wash sales bridge two tax years. If you can avoid that, the wash sale rules actually become moot.

What if the sale bridges two tax years?

Say, I buy 10 shares of ABC at $150 in October, then Sell 10 Shares of ABC December 20th at $50. They report stellar earnings and I am a believer, so I buy 10 shares of ABC at $51 and watch it fall to $40 mid January when I finally sell for good.

Thanks for the clarification.
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<<I pulled this from the US Code. I'm not sure whether Day Traders would fit into the "dealers in securities" category, but they would more than likely incurr these losses in the "ordinary course of business. Can anyone clarify this. >>

"Trading" is a technical term. Most of us are investors. There are very few true "traders". I discuss this issue in more detail in my series of articles on "trading" in the Taxes FAQ area. You might want to check it out for additional information.

TMF Taxes
Roy
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<<So the key is to not let any wash sales bridge two tax years. If you can avoid that, the wash sale rules actually become moot.>>

Correct.

<<What if the sale bridges two tax years?>>

Then you have a wash sale, and the wash sale rules apply. Your loss is not allowed in the year of sale, and you adjust the basis in your repurchased shares. Just as I point out in my article in the Taxes FAQ area.

<<Say, I buy 10 shares of ABC at $150 in October, then Sell 10 Shares of ABC December 20th at $50. They report stellar earnings and I am a believer, so I buy 10 shares of ABC at $51 and watch it fall to $40 mid January when I finally sell for good.>>

Your December 20th sale would not be recognized for tax purposes. When you finally make the January sale, you'll recognize both your initial and repurchased loss. Again, it's all explained in the Taxes FAQ article. Check it out.

TMF Taxes
Roy

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According to the tax book, this rule applies to investors and traders, but not dealers. So he can take
his loss provided he does not buy "substantially identical stock" within 30 days before or after the sale.
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1) If a wash sale occurs, all is not lost -- the loss, while not immediately deductible, is transferred to the stock that was puchased within the 30-day period. The loss goes to raise the basis of the new stock -- so when you finally sell the "new" stock, you report a higher basis. That way, if the stock is sold for a gain, the gain is smaller; if sold for a loss, the loss is greater.

2) All this "wash sale" bookkeepping is unnecessary if all the stock is sold off during the year and you have none of the stock of the "wash sale" company at the end of the year. If you are a pure daytrader, this is the situation you should be in at the close of business on the last trading day of the year. That way, all losses are FULLY deductible for that tax year.

3) Another "wash sale" question : If a stock is sold for a loss in your regular trading account, and you buy the same shares within the 30-day period in your IRA Rollover Account, is this a wash sale ?
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