The wash-sale rule is a regulation that prohibits an investor from claiming a tax deduction for a security sold in a wash sale. A wash sale occurs when an investor sells a security at a loss and repurchases the same or substantially identical security within 30 days before or after the sale.
For example, if an investor sells 100 shares of Company A at a loss and then repurchases the same 100 shares within 30 days of the sale, it would be considered a wash sale.
Penalties for violating the wash-sale rule include disallowance of the tax deduction for the loss incurred in the sale, which can result in higher taxes owed by the investor. Additionally, the disallowed loss from the wash sale is added to the cost basis of the repurchased security, potentially affecting future capital gains or losses.
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The article discusses the wash-sale rule, which prohibits claiming a loss from selling stock or securities if substantially identical ones are acquired within 30 days before or after the sale, aiming to prevent tax manipulation. The rule does not apply to cryptocurrency trading and is reported on Form 8949 to the IRS. It explains the concept, exceptions, and consequences of violating the rule, emphasizing the importance of understanding what is considered "substantially identical" and how to report wash sale losses. Additionally, it provides guidance on avoiding the rule and its impact on tax-loss harvesting strategies.