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Understanding Wash Sales Rules And Reporting To The IRS

When it comes to trading securities, the IRS has some very specific rules. Some of them should be obvious to people, and others are more complicated. Investors should know that the IRS will closely monitor their wash sales. Some may be unfamiliar with this term. These are transactions in which investors get rid of a particular security and show a loss on it. Then they turn around and repurchase the same security, or one like it, within 30 days of the first sale.

Here is a simple example. John Smith currently owns one hundred thousand shares of Global Oil which he sells at a loss of fifty thousand dollars on September fifteenth. On September thirtieth he buys back one hundred thousand shares of Global Oil which he then sells at a profit of seventy-five thousand dollars.

Mr. Doe may think he can take a tax deduction on the five thousand dollar loss he suffered in the first transaction. This will offset the taxes he will be required to pay on the profit he reaped in the second transaction.

Because Ms. Doe repurchased her shares in Johnson Company within 30 days of getting rid of them, she will owe taxes on the whole profit of one thousand dollars. As far as the IRS in concerned, her position with regard to these shares did not change.

Although people buy and sell shares all the time and often deduct any losses they suffer, there is a thirty day rule. It is against the law to deduct losses for these transactions. You cannot deduct losses that occur when you sell shares in a company and then repurchase them, or similar ones, within 30 days.

Trying to get around tax laws is dangerous business. The IRS has strict rules when it comes to wash sales, and they enforce those rules. Investors should be very careful to comply.

Many day traders struggle with reporting their taxable profits to the IRS every year. The vast amount of rules to be followed and necessary paperwork can be truly overwhelming. And you definitely want to avoid a late filing! If you would like assistance with the process, or need online info, give TradeLog a try. They offer software to help with the option wash sale rule and much more.

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