Wash Sale Question

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Dec 1, 2008 12:16 pm

Tell me what you think of this possible wash sale scenario...

I own a stock at a loss and I sell it to capture the loss. I then purchase another stock but that stock gets bought out buy the company I sold (within 30 days) have I violated the wash sale rule? I bring this up because I want to sell my BAC to capture the loss and buy MER. If the deal goes through in the next 30 days I want to know if I can claim the loss.  Any thoughts.
Dec 1, 2008 1:41 pm

If your goal is just to book the loss in BAC, just sell it outright. 

Dec 1, 2008 1:47 pm

The rule prevents you from deducting a loss on a sale of stock if you buy substantially identical securities within the wash sale period.

Dec 1, 2008 2:46 pm
Pending Mergers

Suppose you own stock in a company that's about to be acquired by Bigco. Usually that means a boost in the stock price, but if you have a loss on your shares, the following plan may seem to make sense. Just before the merger you sell your stock and buy shares of Bigco — shares you would have received in the merger if you hadn't sold your original shares. That shouldn't be a wash sale because Bigco isn't substantially identical to the company you sold, right?


Wrong. The tax regulations say that if two different stocks are linked together in such a way that any change in the price of one will be reflected in the price of another, they're likely to be treated as substantially identical securities for purposes of the wash sale rule. If you use this maneuver, the wash sale rule disallows the loss.

Dec 1, 2008 9:05 pm

IRS -- Do you know we can't allow this deduction of the wash sale
You -- But BHO44 on Registered Rep forums said I could
IRS -- Oh...I see


If you want a clear answer, please consult a professional tax advisor





Dec 1, 2008 9:46 pm

Bho,

I'm with you 100%.  But even if I do have to look into something important, I'll pull up wikipedia first.  Then I'll consult an expert. 

But seriously, can't we just promise to look it up from a real source after asking the community? (Thanks B24).  Let's stop the bitching. 

Dec 2, 2008 11:11 pm

The wash rule applies to "substantially identical" securities.  That's a very vague term that the IRS has not specifically defined.  Substantially identical securities can include rights and warrants to purchase common stock, convertible bonds, call options, and yes, even stock on different ends of mergers.

As always, YMMV and consult a tax professional.

Dec 4, 2008 1:14 pm
bho44:

IRS -- Do you know we can't allow this deduction of the wash sale
You -- But BHO44 on Registered Rep forums said I could
IRS -- Oh...I see


If you want a clear answer, please consult a professional tax advisor


 
Sorry I tried to help.  But the rule I quoted is correct (and they were not my words).  And yes, nobody should trust legal/tax advice given on a website chatroom.
Dec 4, 2008 1:44 pm

because an S&P index mtual fund IS substantially different than an S&P etf?  they don't consider that a wash, correct?

Dec 4, 2008 2:40 pm

Not in my opinion, although I have nothing beyond my gut feeling to back up that opinion.  More likely to pass the smell test is selling one large cap growth fund and buying a different one from another family, assuming the holdings are not identical.

Dec 4, 2008 3:28 pm

I agree with Indy.  The holdings are substantially identical, move identically in response to market movements, etc.  Yes, they have slightly different cost structures, slightly different cash holdings, etc.  But you would have a hard time getting this past the smell-test.


What I see often happen is advisors move someone out of an equity position(s), move the money into an index fund/ETF for 30 days, then move them back in, if you are concerned about missing the market.