What are the downsides (impacting returns) of a short-term purchase & sale to cut the loss (other than wash sales rule)?
In the US, IRS wash sales rules indicate that a loss in security exchange cannot be claimed tax deductible in the same year income tax filing, if the transaction of purchases & sales takes place within a month.
I am thinking of purchasing new stocks but decide to cut my losses if there is a 10% drop in the stock value but do plan to repurchase the same stocks (because of the companies) and keep them if the value drops further to a 25% loss of the "initial" value.
Other than not able to claim tax deduction for the initial 10% loss in the same year, are there additional downsides for a short-term investment that would further encroach on the return ?
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With the Wash Sale rule, if you sell a security at a loss and buy the same or “substantially identical” stock or security within 30 calendar days before or after the sale, the loss is disallowed for current income tax purposes. If you violate the wash-sale rule, you can’t claim your loss and your loss will be added to the cost basis of the replacement purchase. When you sell the replacement stock, you can recognize the previously disallowed loss.
Unfortunately, many people read the words violate and disallowed and conclude that the ability to deduct loss is lost. It is not. It is merely delayed until a later date.
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