JARGON DECODER Money Laundering They don’t call it “Wall Street” for nothing; the big banks there build bigger barriers of baffling terminology to keep regular Fools like you intimidated, underconfident, and ready to fork over your cash to a broker. Each week, Jargon Decoder translates one of those worrisome words or phrases into plain English, helping you get a leg up on the Wall Street Wise. This week’s term: The wash-sale rule. Uncle Sam prevents people from scoring dishonest tax breaks by making it illegal to sell a stock at a loss, use that loss to offset taxes on other gains, and then buy back the same stock within 30 days. As tax season approaches, you’re probably looking for every legal loophole to lower what you owe the government. You probably already know that if you lose money when you sell a stock, you can use the amount you lost on that transaction to cancel out equal gains from buying low and selling high. A quick example: You buy 10 shares of Stock A at $35, and later sell them at $10. You’ve lost $25 per share, or $250 total. In the same year, you buy 10 shares of Stock B at $25, and later sell at $85, netting a $60-per-share profit, or $600 total. The IRS allows you to offset your $600 gain with your $250 loss, so that you only owe taxes on a total of $350. Ah, but what if you try to game the system? What if a stock you like and plan to hold for a long time just happens to be down at the moment? Why, you could sell it for a loss, wipe out at least a chunk of your gains, then buy back those shares right away, at essentially the same price. Your holdings wouldn’t have changed, but you’d have weaseled your way into a cunning on-paper tax break. The whole thing, as they say, would be a wash. (Hence the name.) Except, of course, you can’t do this. Uncle Sam is wise to your tax shenanigans, and like the current president, he maintains a strict “no malarkey” policy. You can’t buy AND sell the same stock, in the same amounts, within 30 days, and count any losses off your tax bills. And if you sell a stock at a profit, then buy the shares right back, you’ll still pay taxes on the entire profit, too. To avoid having the IRS take you to the cleaners, learn more about the wash-sale rule.
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