Day traders and long-term stockholders alike can benefit from claiming capital losses on their tax returns, since claiming a capital loss can offset taxes incurred on capital gains. This can often make the sting of a capital loss a bit less and can put more of your capital gains money back in your pocket. However, it's not always this easy, since the US tax code keeps people from abusing this quasi-loophole via the Wash Sale Rule. Navigating this rule can make a big difference in your tax burden, so for a few tips on strategic tax planning, here is some information:
What is the Wash Sale Rule?
The Wash Sale Rule is codified in 26 US Code 1091 and specifies the rules surrounding the sale of assets at a loss and stipulates what an investor cannot do before or after selling at a loss. In short, this rule says that you cannot buy a "substantially identical" stock or security" or otherwise acquire or move into a position to acquire such an asset in the future. This includes buying an option for the same stock or putting the stock in an IRA, as well.
If you do indeed buy back a stock you recently (within 30 days) sold for a loss, then you can't report the capital loss on your taxes as a deductible, and if you do buy the stock back, then you have to treat the stock or asset as if you had bought it at the price you bought it for originally, plus the amount per share you lost on the wash sale. This can mean you can't report the gain you made after the wash sale until the price has increased past the price you paid the first time you bought the stock or asset.
How Do I Get Around This?
The simple way to get around this rule is to simply wait 31 days until repurchasing the stock or asset, which will clear you of the wash sale rule's clutches on your capital losses, which you'll then be able to claim on your taxes. Another option that's available, and that's especially attractive to long-term investors, is to invest the same amount of money in another, similar stock within the same sector. This could be beneficial to long term investors who trade in companies that are closely tied to commodities, for example, since the commodities price will often affect almost all related companies' stock prices similarly, making it easy to switch from stock to stock within a specific industry.