If you own stock that is currently worth less than what you paid for it you might wish to consider selling it and then reacquiring it by purchase -- if you think that the stock has reached its low point but feel that it is likely to bounce back and bounce back soon. However, if you have something like this in mind, you should be aware of the so called “wash sale” rule. That rule basically provides that if a non-securities dealer sells stock at a loss the loss will not be deductible for tax purposes if the taxpayer acquires substantially identical stock within the so called “wash sale period” -- which is the sixty one day period that begins thirty days before the sale and ends thirty days after the sale. That is the bad news. The good news is that the disallowed loss can be added to the cost basis of the substantially identical stock that you acquire.
For example, if on January 15, 2017 you acquired one hundred shares of corporation X stock for $1,000; then sell it on December 15, 2017 for $600; then acquire substantially identical stock on January 5, 2018 for $700 -- the $400 loss on the December 15, 2017 sale ($1,000 less $600) would not be deductible on your 2017 income tax return but that disallowed loss would be added to the basis of the stock that you acquire by purchase on January 5, 2018 -- thus increasing the basis of the stock that you would then own from $700 to $1,100. Moreover, the holding period of the stock that you now own would include the period during which you held the stock that was sold on December 15, 2017 for purposes of determining whether any subsequent sale of the stock that you now own is long term or short term.
Other considerations may come into play concerning this rule depending upon one’s particular facts and circumstances. For example, this rule can apply even if you don’t actually acquire substantially identical securities within the wash sale period; the rule would apply as well if you merely contract or obtain an option to acquire substantially identical securities within that period.
If you have questions or desire additional information regarding this subject feel free to contact Peter Sheldon in the Lansing, Michigan office at 517-487-4720.