Clients may sell securities at a loss for various reasons, including rebalancing portfolios and, especially as year-end approaches, lowering their tax bills.
It may seem like a simple strategy, but it’s worth reminding clients of an important financial hazard that could unravel it — the wash sale rule, found in the U.S. Internal Revenue Code.
As Charles Schwab explains on its website, a wash sale occurs when an investor sells a security at a loss to gain tax advantages and buys the same or “substantially identical” asset within 30 calendar days before or after the transaction – effectively a 61-day window.
Selling a losing stock and buying an option on it within the 30 days also amounts to a wash sale.
A wash sale prevents the investor from taking advantage of the sale for the current tax years.
To help clients better understand the wash sale rule, ThinkAdvisor presents the following quiz, drawn from materials from Schwab, J.P. Morgan Private Bank, Fidelity and Intuit TurboTax.
Images: Chris Nicholls/Touchpoint Markets
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.