WASH SALE RULE

When using tax-loss harvesting strategies, it is important to be cognizant of the wash sale rule. 

The wash sale rule states that if a security, or substantially identical security, is purchased 30 days prior to or 30 days after the date the security is sold, the loss generated from the sale cannot be utilized for tax purposes. Instead, the loss is added to the basis in the newly acquired asset.

The wash sale rule can be avoided by buying a comparable asset anticipated to have similar performance. This allows the individual to benefit from the realized loss while still allowing their investment portfolio to experience similar growth.

Investors should also be mindful of the type of replacement security they are considering. As a rule of thumb, avoid swapping out securities that track the same index - by their very nature, index funds are meant to replicate the same investments at approximately the same weight, and as such, they can be viewed as substantially equal.

The wash sale rules also apply across different accounts and different account types. For example, if an individual sells a security at a loss in a taxable account and purchases the same security in their IRA, the loss will be disallowed. This is especially ill-advised, because the intention of repurchasing is often to capture the upside; however, when repurchased in an IRA or other qualified account, the loss is effectively gone forever.

Robert W. Baird & Co. Incorporated. Baird nor the Stevanovic Metz Group provide tax advice. Contact your tax professional.