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How the IRS Determines Wash Sales

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The IRS defines a wash sale as “a sale of a security at a loss and the purchase of a substantially identical security 30 days before or after the sale.” Wash sales are important to traders because losses incurred from wash sales cannot be used to offset other gains for tax purposes. In other words, if you sell a stock at a loss and repurchase it within 30 days, you cannot claim that loss on your taxes. So how does the IRS determine wash sales? Read on to find out.

What is Needed For a Sale to be Considered a Wash Sale

There are three main criteria that the IRS looks at when determining whether or not a sale is considered a wash sale: 

  • The timing of the purchases and sales: Was the substantially identical security purchased 30 days before or after the sale? 
  • The type of security involved: Was the security sold a common stock, mutual fund shares, or an option? 
  • The accounts where the transactions took place: Was the substantially identical security purchased in a different account than the one in which it was sold? 

If all three of these criteria are met, the IRS will likely consider the sale a wash sale. 

Many taxpayers ask “do wash sales apply to my retirement account?” We can answer that for you in this post.

Bottom Line

Wash sales can be tricky to navigate, but it’s important to be aware of them if you’re a day trader. Understanding how the IRS determines wash sales can help ensure that your trades are correctly reported come tax time.

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