12-06-2011, 01:06 PM
Yeah, it's only a problem if you sell at a loss, but it applies 30 days before OR after. So say you buy 100 NFLX. It drops so a week later you buy 100 more. Two weeks after that you sell your original 100 shares for a loss. You can't offset your taxes with that loss! The IRS will catch you, skin you alive, and feed you to their tax inspectors.
It can be a major impact on your taxes. If you take $5000 in losses and $10,000 in gains in a year, you are only going to get taxed on $5,000 of gains. But if all those $5000 in losses are wash sales, you get taxed on the full $10,000...even thought you only actually came out $5,000 ahead.
It's a bigger problem for traders than investors, and especially options traders. I trade call spreads, which means I make gains on one strike and losses on the other (ideally for a total gain). I recently sold a Google spread where sold the lower strike for around a $10,500 profit, and the upper strike for around a $9,800 loss, for a total gain of $700. If I'd bought GOOG back right away, I'd have had to pay tax on the whole $10,500 - much more tax than the actual profit I made! Yikes...
It's actually a lot more complicated than that, and you can still offset future sales by adding to your cost basis on the second purchase (within the wash period).
The safest thing to do is just trade in an IRA account, so you don't have to report the trades to the IRS.
It can be a major impact on your taxes. If you take $5000 in losses and $10,000 in gains in a year, you are only going to get taxed on $5,000 of gains. But if all those $5000 in losses are wash sales, you get taxed on the full $10,000...even thought you only actually came out $5,000 ahead.
It's a bigger problem for traders than investors, and especially options traders. I trade call spreads, which means I make gains on one strike and losses on the other (ideally for a total gain). I recently sold a Google spread where sold the lower strike for around a $10,500 profit, and the upper strike for around a $9,800 loss, for a total gain of $700. If I'd bought GOOG back right away, I'd have had to pay tax on the whole $10,500 - much more tax than the actual profit I made! Yikes...
It's actually a lot more complicated than that, and you can still offset future sales by adding to your cost basis on the second purchase (within the wash period).
The safest thing to do is just trade in an IRA account, so you don't have to report the trades to the IRS.
Ex SWG, L2, CoH, Wow, and War
Currently PvPing in the stock market
Currently PvPing in the stock market