Tax Loss Harvesting (TLH)
If you have a taxable stock market portfolio (not IRA or 401K), and you
have stocks or mutual funds showing a paper loss, you may benefit from
Tax Loss Harvesting: selling securities
(stocks, mutual funds, realestate) at a loss to offset your income tax and capital
gains tax liabilities. To avoid the
IRS “wash sale rule” you must wait 30-days to re-purchase the same
securities or you may immediately purchase securities that are not
“substantially identical”.
Wash Sale
A "Wash Sale" occurs when you sell losing securities and buy "substantially identical" securities within 30 days.
The following is taken from Page 55 of 80 IRS Publication 550 or IRS Wash Sale Web Page:
"Wash Sales
<>You cannot deduct losses from sales or trades of stock or securities in a wash sale.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
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Buy substantially identical stock or securities,
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Acquire substantially identical stock or securities in a fully taxable trade, or
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Acquire a contract or option to buy substantially identical stock or securities.
If you sell stock and your spouse or a corporation you control buys
substantially identical stock, you also have a wash sale..".
Note: More information and examples are included in these IRS links.
Substantially Identical
The following is taken from Page 55 of 80 IRS Publication 550 or IRS Wash Sale Web Page:
In determining whether stock or securities are substantially identical,
you must consider all the facts and circumstances in your particular
case. Ordinarily, stocks or securities of one corporation are not
considered substantially identical to stocks or securities of another
corporation. However, they may be substantially identical in some
cases. For example, in a reorganization, the stocks and securities of
the predecessor and successor corporations may be substantially
identical. Similarly, bonds or preferred
stock of a corporation are not ordinarily considered substantially
identical to the common stock of the same corporation. However, where
the bonds or preferred stock are convertible into common stock of the
same corporation, the relative values, price changes, and other
circumstances may make these bonds or preferred stock and the common
stock substantially identical. For example, preferred stock is
substantially identical to the common stock if the preferred stock:
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Is convertible into common stock,
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Has the same voting rights as the common stock,
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Is subject to the same dividend restrictions,
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Trades at prices that do not vary significantly from the conversion ratio, and
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Is unrestricted as to convertibility.
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