Wash Sale Rule 101
I’m Meta Matt, Director of Education and welcome to PB University LITE! This is a 50 Class Trading 101 Series geared towards both new and veteran traders alike! We go over everything from Trading Psychology, Technical Analysis, and Options Trading to Commodity Trading, Forex, and more!! This 50 Class series is not designed be taken in order, it is instead designed for traders to browse and pick which classes interest them. I will include the list of classes at the bottom of this page.
Start Trading With Webull: Free Stock Shares
Custom Trading Indicator DISCOUNT: Try StocksBuddy Today
Get A Trading Coach, Premium Alerts, Education, and Community:
1 Month Membership
90 Days (Save 10% Per Month)
1 Year (Save $279)
The Wash Sale Rule is a regulation implemented by the IRS that applies when you sell a security at a loss and then purchase a substantially identical security (the same stock, an ETF that is virtually the same, stocks within the same parent company, etc) within 30 days before or after the sale.
If this happens, the IRS won't let you claim the loss on your tax return. In trading, losses can be utilized to offset your overall taxable income, potentially reducing the amount of income that is subject to taxation.
Claiming losses can act as a tax deduction to help reduce your taxable income. If you had gains from other investments, the losses can help offset those gains, potentially lowering your overall tax liability.
Losses that exceed your gains can be used to offset future gains for the next or future tax years. So if you sell a stock at a loss, only to buy it back in 30 days. You can’t claim that loss.
If you trigger a wash sale, the disallowed loss isn't gone forever. Instead, it gets added to the cost basis of the replacement security.
So, when you eventually sell that replacement security at a profit, the previously disallowed loss can be factored in. It's like having a rain check for those losses.
So for example you buy Stock A for $1,000 and then sell it for a loss of $100, so you get $900 back.
Then you buy that same stock within 30 days for $900. Now that $100 loss is a “disallowed loss” from the wash sale and is not deducted on your current tax return.
Instead the disallowed loss is added to the cost basis of the stock. So since you rebought the stock at $900 adjusted cost basis will be $900 + $100 (which was your disallowed loss from the previous wash sale trade) making your adjusted cost basis $1,000.
So now if you eventually sell that stock, you will factor in the adjusted cost basis for your overall profit. So if you sell that stock for $1,200 down the line. Your profit will be $1,200 (the selling price) - $1,000 (your adjusted cost basis for that stock) making the taxable profit $200. Even though on that last trade you technically made a profit of $300 (buying at $900 and selling at $1,200) your previously disallowed $100 Wash Sale Loss is factored in, essentially acting as a “deferred” loss. This is why it’s important to keep track of the history of your wash sales, especially if you trade the same stock a lot.
PB University LITE Class List
1) Trading Terminology
2) Stock Market Indices
3) Common, Preferred, and Penny Stocks
4) Diversification of Assets
5) Fundamental Analysis Made Easy
6) Technical Analysis Made Easy
7) Risk Management In The Market
8) Portfolio Management
9) How To Follow Market News
10) Trading Psychology
11) Options Explained
12) The Greeks In Options Trading
13) How To Short Sell Options
14) Covered CALLS
15) Spread Trading
16) Online Brokers for Options Trading
17) Implied Volatility Calculators & Tools
18) Protective PUTS
19) Iron Condors
20) Straddles
21) Reading Level 2
22) Taxes
23) Trading Psychology Techniques
24) The Art Of Trading
25) Becoming A Jedi In The Stock Market
26) Futures Trading Explained
27) Commodity Trading 101
28) Regulatory Environments
29) How To Become A Millionaire
30) $100K In 100 Days
31) Wash Sale Rule
32) Behavioral Finance Part 1
33) Behavioral Finance Part 2
34) 5 Charting Indicators
35) Fair Value Gap
36) Insider Trading and Market Manipulation
37) Stock Chart Types
38) Moving Averages 101
39) Base vs Precious Metals
40) Electricity Trading 101
41) Trading Brokers 101
42) 5 Trading Strategies
43) 85% Trading Rule
44) Are Win Rates A Scam?
45) Futures Trading 101
46) ATR Indicator Strategy With The Greeks
47) MACD Indicator 101
48) Bollinger Bands Indicator 101
49) Wedges, Triangles, Flags and Pennants
50) RSI Divergence 101
