Wash Sales

In what is referred to as a wash sale, you sell or dispose of stock or other securities, including options, at a loss, and within 30 days either before or after the date of the sale or disposal you directly or indirectly buy substantially identical securities or acquire them in a taxable trade, or you enter into a contract or purchase an option to acquire substantially identical securities.  A transaction could also be a wash sale if your spouse or a corporation you own acquires substantially identical securities within 30 days.

Losses on Wash Sales

Losses from wash sales are not deductible for tax purposes, unless you are a dealer in stock or securities and the loss was incurred in the normal course of your business.  Otherwise, the disallowed loss is added to the basis of the substantially identical stock or securities you purchase or acquire.  In this sense, the loss is postponed until you sell or otherwise dispose of the new securities you acquire.  The holding period for the new securities begins on the same date as the holding period for the securities you sold.

What Are Substantially Identical Securities?

What are considered substantially identical securities depends on the circumstances.  Normally, securities of different corporations are not considered substantially identical, although they could be in the case of a corporate reorganization.

Bonds or preferred stock in a corporation are generally not considered to be substantially identical to common stock of the same corporation.  But preferred stock that is convertible into common stock may be considered substantially identical to the common stock if it has the same voting rights, is subject to the same restrictions on dividends, it trades at prices that are not significantly different from the common stock prices taking into account the conversion ratio, and are not restricted as to their convertibility.