Dear Clients and Friends:

In connection with your stock transactions, it's important for you to be aware of the "Wash Sale Rules (WSR)."

Under these rules if you sell stock for a loss and buy it back within the 30-day period before or after the sale date, the loss cannot be claimed for tax purposes. This rule is designed to prevent taxpayers from selling stock to claim the loss while buying it back within a short period of time to retain ownership. Note that the rule applies to a 30-day period before or after the sale date to prevent "buying the stock back" before it's even sold. (If you participate in any dividend reinvestment plans, the WSR may be inadvertently triggered when dividends are reinvested under the plan, if you have separately sold some of the same stock at a loss within the 30-day periods.)

Although the loss cannot be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. Thus, it can be claimed when it is finally disposed of other than in a wash sale.

Example. Henry buys 500 shares of ABC Corp. for $10,000 and sells them on June 5 for $3,000. On June 30, he buys 500 shares of ABC again for $3,200. Since the stock was "bought back" within 30 days of sale, the WSR apply. Henry cannot claim his $7,000 loss. His basis in his "new" 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss. If only a portion of the stock sold is bought back, then only that portion of the loss is disallowed.

Thus, in the above example, if Henry had only bought back 300 of the 500 shares (60%), he would be able to claim 40% of the loss on the sale ($2,800 under the facts involved). The remaining $4,200 of loss disallowed under the WSR would be added to Henry's cost of the 300 shares.

Note that while wash sale losses cannot be claimed, gains cannot be avoided. That is, if you sell stock for a gain and buys it right back, you must still report the gain-no special rule applies.

If you have any questions or wish to discuss this matter further, feel free to give me a call at 315-363-3338.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner