If you own a stock in a taxable account that falls in value, you can take some of the sting out of that loss by selling your shares, realizing a capital loss and then using that loss to reduce your annual tax bill. A good idea? Problem is, selling means giving up any chance of making back the loss.
Many folks aren’t keen to do that, so they often look to buy back the shares. But if they do that too quickly, they can invalidate the tax loss. At issue here is the wash-sale rule. If you buy the same or a substantially identical security within 30 days before or after you sold the losing stock, you aren’t allowed to claim the tax loss. The rules for what is allowable and what isn’t are a matter of debate. Still, let’s say you sell a stock and soon after buy options that give you exposure to the same shares. That would count as a wash sale and invalidate the loss.
That doesn’t mean the loss can’t ever be used. Instead, the earlier invalidated loss is added to the cost basis of the new security you bought. To make use of that loss, you will have to wait until you sell the new security, assuming you do so without violating the wash-sale rule.
Previous: Tax-Loss Harvesting