John M. Hoffman & Associates CPAs

Frequently Asked Questions

Capital Gains and Losses

"What about wash sales - what is that all about?"

Wash sale rules are designed to prevent taxpayers from claiming capital losses on sales where the taxpayer really didn't dispose of the underlying asset. Let's say that I bought 100 shares of CMGI stock for $75 per share, totaling $7,500. CMGI has plunged to $2.00 per share. I would love to take the loss on the stock but I am still convinced that I want to hold on in case it goes back up.

If I sell the 100 shares of CMGI stock on November 1 to take the loss and buy  back 100 shares on November 15, the IRS position is that I am not entitled to claim the loss because I still own the stock. The wash sale rule says that I can not buy the same asset 30 days before or after the sale date for the transaction that I want to claim the loss for. With that in mind, I can not buy those 100 replacement shares of CMGI from October 2 through November 30 if I want to claim the loss on the shares sold on November 1.

To work around those rules, I would buy 100 shares of CMGI on October 1, and then my sale on November 1 of the original (old high cost basis shares) CMGI stock at a loss would be allowable, and I would still at the end of the day have 100 shares of CMGI.

Another way to deal with this is to buy "similar" securities. For example I could sell my Vanguard Growth Fund shares and replace them with Fidelity Growth Fund shares. "Substantially Identical" securities (if you can define that) will not work.