What is a wash sale and how does it impact my trading taxes?

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by kay.wiza , in category: Trading and Technical Analysis , 9 months ago

What is a wash sale and how does it impact my trading taxes?

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1 answer

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by andy , 9 months ago

@kay.wiza 

A wash sale is a transaction in which an investor sells a security at a loss and then purchases the same or a substantially identical security within a short period, typically within 30 days before or after the sale. Wash sales are not allowed for tax purposes.


The impact of a wash sale on your trading taxes is that you cannot claim the loss for tax purposes if you buy back the same security within the wash sale period. Instead, the loss is disallowed and added to the cost basis of the new security you purchased.


For example, let's say you bought stock XYZ for $1,000 and later sold it at a loss for $800. If you then repurchase the same stock within 30 days, the loss from the sale will be disallowed, and your cost basis for the new purchase will be increased by $200 (the disallowed loss). This adjustment will affect your capital gains or losses when you eventually sell the new security.


Wash sales are primarily aimed at preventing investors from generating artificial losses for tax purposes. It is essential to be aware of the wash sale rule to ensure accurate reporting of your trading activity on your tax return.