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Mastering Tax Loss Harvesting: Navigating the Wash Sale Rule for Optimal Tax Savings

Introduction:

Tax loss harvesting isn't just a year-end strategy; it's a powerful tool available whenever you need it. However, navigating the wash sale rule is crucial to maximize your tax-saving capital losses. In this blog post, we'll explore how the wash sale rule works, strategies to defeat it, questionable IRS positions, and the exemption of cryptocurrency losses.


Understanding the Wash Sale Rule:

The wash sale rule disallows a capital loss if, within the 61-day period (30 days before and after the loss sale), you purchase substantially identical securities. The idea is to prevent an economic "wash" of losses. Fortunately, disallowed losses increase the basis of the identical securities, reducing future tax gains.


Strategies to Defeat the Wash Sale Rule:

Defeating the wash sale rule is essential when you want to sell a security for a tax-saving loss but still anticipate future appreciation.


1. Double Up Strategy:

   Buy the same number of shares before selling the original batch for a loss. Wait 31 days to sell the initial shares, maintaining ownership and benefiting from future appreciation.


2. Call Option Strategy:

   Purchase a call option on the stock you want to sell for a loss. Wait at least 31 days before selling the stock, avoiding the wash sale rule.


Related Party Acquisitions and the Wash Sale Rule:

Raises questions about whether the wash sale rule applies when a related party, such as a spouse or IRA, acquires substantially identical securities. Highlights unclear IRS positions and advises consulting with a tax professional in such situations.


Cryptocurrency Losses Exemption:

As of now, cryptocurrency losses are exempt from the wash sale rule since the IRS classifies cryptocurrencies as "property" rather than securities. However, the possibility of legislative changes looms, and investors should stay informed.


Conclusion:

Tax loss harvesting is a valuable strategy, but understanding and defeating the wash sale rule is crucial. Be aware of IRS positions, explore effective strategies, and stay informed about potential changes, especially in the evolving landscape of cryptocurrency taxation. Always consult with a tax professional for personalized advice tailored to your financial situation. Start optimizing your tax savings today.


Disclaimer: Laws and regulations are subject to change, and readers are advised to consult EPL advisors for personalized advice and compliance with specific state requirements. This information is not specific advice and is meant for general education. 

You can reach our CEO and founder Peter Ellefson anytime at Peter@eplfs.com


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