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Coming Clean on Wash Sales

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A wash sale is one of many strategies for investors looking to keep more money in their pockets. In this series, tax guru Julian Block explains the wash-sale rules so you can help your clients who are investors lower their tax bill.

Nov 10th 2021
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It’s no surprise that clients expect their accountants to advise them how to take full advantage of often-overlooked strategies to lower their taxes this year and provide head starts for future years. Ditto for advice on how to steer clear of pitfalls. 

A proven way for accountants to display expertise to clients and prospective clients is to explain strategies in understandable language. To help accountants do that, I’m devoting several columns to the much-misunderstood rules for wash sales (Internal Revenue Code Section 1091).

Let’s say your client, a savvy investor, owns stocks that have mostly done well this year, but her holdings include shares in several companies that presently are significantly below their original purchase prices. Now, she wants to sell those losers to recognize tax losses.

I would caution this client to consider the calendar in case she sells and then decides to buy them back because of a gut feeling that those depressed stocks will eventually recover. Unless at least 31 days elapse between the sale and the repurchase, she’ll run afoul of the long-standing “wash-sale” rule and have to forgo her loss.

First, some background about capital losses that your client can use to offset capital gains from sales or redemptions of stocks, bonds, mutual funds and the like. What if there aren’t any gains, or the losses exceed gains? 

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