NOTICE: You have sustained a wash sale on XYZ security.
If you have ever had the misfortune of a notice from your trading platform or broker of a wash sale you probably said to yourself, “What?”
A wash sale is a sale of a security (stocks, bonds, options) at a loss and repurchase within a 30-day timeframe (before or after the loss), of the same or substantially identical security. As soon as you purchase the same or similar security you just sold at a loss, a wash-sale notice is triggered. Losses from such sales are not deductible as ordinary losses, in most cases, under the Internal Revenue Service Code in the United States. That means you can’t use that loss in that position to offset any gains for the year on all your other trading.
Wash-sale regulations disallow an investor who holds an unrealized loss from accelerating a tax deduction into the current tax year unless the investor is out of the position for more than 31 days. It’s a rule made to counter someone who wants to sell at year’s end and get a loss on their tax return, then buy back the same security a few days later in the new year. Do note that a wash sale can take place at any time during the year or across year boundaries.
I like to make my trading life simple and profitable. You can completely avoid wash sales within your trading business by using a Section 475 mark-to-market election. I describe this gem in The Business of Trading, my book on how to turn your hobby of trading into a thriving business.
By filing a one-page election with your tax return, wash sale will be a thing of the past. Never again do you need worry about what security you can trade for fear of the wash sale, as wash sales are not incurred with the section 475 election. With the election in place the wash-sale loss is now fully considered an ordinary loss, just like any other losing trade.
Of course, we want profitable trades on a consistent basis. Being in a trading business forces you to always be thinking about the bottom line. However, knowing you are playing a probability game in trading, you must know that some losses are inevitable. When losses do come, I want to make sure I get full credit against my other gains to reduce my taxable income.
Using the Section 475 Election allows us to focus on winning trades without the worry of the wash sale notice. Consider it as part of your overall strategy to produce a thriving, profitable business in trading.
Enuf said.