Taxes

• A taxable event always occurs when an investor sells stock. If the investor sells the stock for more than she paid for it, she has a capital gain. If the investor held the stock for more than a year and sold it for more than she paid for it, the capital gain is taxed at the more favorable long-term capital gains rate. If the investor sold the stock for less than she paid for it, she has a capital loss. While nobody wants to lose money in the stock market, sometimes it makes financial sense to take a loss to offset taxes from capital gains.
  
  

Repurchasing Stock

• An investor may believe that a stock she owns that has decreased in value is still a viable investment, but she wants to take advantage of tax laws that allow her to record a capital loss by selling the stock at a loss. She may wish to sell her stock at a loss and then repurchase the stock to lower her cost basis. There is no law that prevents an investor from selling her stock at a loss and immediately purchasing the same number of shares of the same stock, but she will not be able to claim the capital loss on her income tax return. This type of transaction is known as a wash sale.
  
  

Wash Sale

• An investor who sells stock at a loss, and purchases or otherwise acquires stock that is substantially identical within 30 days after the sale or before the sale, has conducted a wash sale. The stock of one corporation is usually not considered substantially identical to the stock of another company, even if they are in the same industry. Wash sales also apply to investors who purchase an option to buy substantially identical stock. A wash sale occurs if the investor's spouse buys the stock, or if a corporation or partnership controlled by the investor buys the stock. The end result is that the investor may not deduct losses that were incurred as part of a wash sale.
  
  

Considerations

• Wash sales only apply to losses. An investor can wipe out a capital loss by a wash sale, but she cannot wipe out a capital gain, and thus avoid capital gains taxes, by repurchasing the same stock. Wash sales only apply to the number of shares re-purchased. If the investor re-purchased fewer shares than she sold, she would still be able to take the capital loss on the number of shares that were not re-purchased.