After both of the severe stock market crashes that we’ve seen this century, we’ve learned some valuable lessons about how to avoid future devastation. By making smarter choices in how we invest now, and anticipating downturns that will occur in the future, we can position ourselves to benefit when the market is up, and soften the blow when the market goes down.
What are Wash Sales?
“Wash Sale” is an IRS term for when a person sells an investment at a loss, then turns around and immediately buys the investment back. The problem with wash sales is that you can’t include the capital loss on your tax return, so you just take the loss without being able to claim any of the resulting benefits.
How to Avoid Wash Sales
There are a couple of ways to avoid a wash sale. One option is to immediately invest the money into different stocks than the ones you just sold. The other option is to wait at least 30 days, and then repurchase the same stock you sold.
For example, suppose Suzy invested in some health care stocks, and then the market dipped. Suzy sells her stock and now has $30,000 of losses in health care stocks. Suzy can reinvest that $30,000 immediately into tech stocks, if she feels that is her best opportunity. However, if she thinks that the health care sector will make a comeback, she can buy different health care stocks and funds. If she really wants to reinvest in the stocks she just took a loss from, she can wait at least 30 days, and then repurchase the ones she sold.
In either of those scenarios, Suzy is maintaining her ability to use her capital losses in a future market recovery by staying invested, but not in a wash sale.
Next week we’ll explore other ways you can strengthen your stock portfolio to protect yourself against future downturns. Do you have any questions you would like to see answered on our blog? Reach out to us on Facebook to let us know!