Tax-loss selling: If you’re dumping your dogs, read this first - The Globe and Mail

Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. Many investors like to sell their losing stocks in order to claim a capital loss that they can use as a tax write-off. However, the wash-sale rules prevent you from taking that loss if you repurchase the same stock within a day period. As a result, although you can buy and sell shares of stock anytime you wish, you have to be careful with multiple purchases and sales within a day period if you're looking to take a tax loss.

Let's take a closer look at this situation to explain how it works. Why people want to sell and buy In many cases, shareholders who have lost money want to take a tax loss but don't want to stop owning the stock, hoping that the shares will rise and help them recoup their losses.

The wash-sale rules prevent you from using the obvious strategy of selling the shares to take the tax loss but then immediately buying them back. In particular, the wash-sale rules apply to purchases made within 30 days before or after the sale of the stock.

If you do so, you lose the ability to claim the tax loss. Fortunately, even if you trigger the wash-sale rules, you don't lose the tax deduction permanently.

Instead, if you trigger a wash sale, the tax basis of the shares you purchased is increased by the amount of the disallowed loss. When you sell those shares at a future date, you'll benefit from that higher basis, either by giving you a larger capital loss or by reducing any capital gain that you earn in the interim. However, it's important to understand that wash-sale rules apply across accounts at different financial institutions as well as to different types of accounts.

For instance, if you sell shares at a loss in a regular taxable account and buy the same shares in an IRA, the wash-sale rules still apply -- and an IRS ruling found that no basis adjustment in the IRA is allowed, costing you that loss forever. Finally, many people get confused about whether wash-sale rules apply to gains.

They do not, and so repurchasing shares within 30 days doesn't allow you to avoid recognizing capital gains or affect the basis of the repurchased shares. When tax considerations aren't a factor, investors can buy and sell shares as many times as they want.

If you want to claim a tax loss, however, you'll have to be extremely careful about selling and buying shares within a day period. If you're ready to invest, check out our Broker Center to see your options.

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