Having a wash sale ever good?
I'm wondering if a wash sale would ever be beneficial to someone. My theoretical scenario is that someone is not making much this year, and so they day trade and go in and out of stock, making both gains and losses on the sales of that single stock. This will mean that for the losses, they will be considered wash sales. That person day trades this single stock, accruing more wash sales periodically until the next year when they finally sell all their shares for good. If that person is making more in salary that second year, does writing off these wash sales a year later actually benefit them more than had they avoided wash sales and written the losses off the first year?
Basically, if I have a bunch of wash sale losses that I miss out claiming during a low income year, do I actually benefit by carry those loses over into the next tax year if I expect to make higher income?
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Note that the IRS has rules prohibiting short term wash sales: Source. You would have to have at least 30 days between the sell and a rebuy of the same stock in order to claim a loss, so "day trading" is not really applicable.
That said, in the absolute very best case you get to lock in a loss now at the cost of paying larger capital gains later (in the case where the asset goes back up in price). Other scenarios involve you simply holding on to a losing asset.
Finally, trying to apply wash sale losses to the same year where you sell the stock for good is equivalent to having done nothing. You would only see the benefit of a loss now vs higher capital gains later if you applied the losses to a year prior to selling the stock for good.
If I understand the strategy you are describing correctly, yes, you are in a better position with this strategy than had you just sold the stocks in your low income year to write off the loss that year, assuming your marginal tax rate is higher in the later high income year.
However an easier strategy with the same benefit is to just sell the stocks, pay capital gains tax, and rebuy the next day in the low income year. No reason to mess around with wash sales, those just keep your cost basis at whatever it was before the wash sale. If this strategy is not an option you should just hold the stock and not sell, or try to play any wash sale games since those get you nowhere (that is kind of the point).
Yes. I sell a stock for a loss in November. I realize, in 25 days, that my loss will offset a long term gain, which would otherwise avoid tax as I am in the 15% bracket. I buy the stock back, and have a wash sale. I sell in January and claim the loss in the next year, again ordinary income (up to 00) and while in the 25% bracket.
I'm not sure if we're on the same page with "day trade a stock making gains and creating wash sales". In order for that to make sense, you'd need two legs, either a stock and its option(s) or a pairs strategy (two unrelated securities, one long, one short). After price movement in one direction, you'd book the leg with a gain, paying taxes on it this year and carrying the loss forward into the next year, benefiting from the loss in the subsequent year.
There are a number of complex tax regulations which you must not run afoul of. The "substantially similar" rule would be one. As an example of attempting the reverse of your scenario, prior to 1997 you could "short against the box" in order to delay a taxable event.
AFAIC, this approach would only make sense late in the year when you could book the gain on 12/31 and take the loss on 1/02. Too much can happen if you close one leg now and there's 10+ months until you can close the other leg.
My guess is that the IRS will not have an issue if you are paying taxes sooner (this year) rather than later (next year).
Take this reply with a grain of salt (g). Verify the tax consequences before executing.
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