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Ins and Outs of Tax-Loss Harvesting

September 14, 2020

Strategies to navigate the wash-sale rule 

A key part of tax-loss harvesting is managing the wash-sale rule. The wash-sale rule does not recognize a loss from selling a security if a “substantially identical” security is purchased 30 days before or 30 days after the sale date. This applies whether the transaction is within the same account, in different accounts or even in a spouse’s account. The rule would also apply if one stock is sold at a loss in a taxable account and repurchased in a non-taxable account, like an individual retirement account, within the restricted period. 

The most straightforward way to avoid triggering this rule is to purchase a different security or hold off on buying any securities for 31 days after a sale. But that comes with risk. 

“Most fund clients don’t want to do that,” says E. George Teixeira, tax leader of financial services practice at Anchin, an accounting and advisory firm. Clients worry that securities could increase in value during that time when they’re waiting to get back into the market. 

To get back into the market faster, there are several advanced strategies advisors can adopt.

One of the more common methods is to interpose an option — either a call option or a short — in between the selling and buying. Investors can sell the security at a loss, then buy an out-of-the-money call option on the security, buy back the same or similar security and finally sell the option. The transaction can be done over three days.

Read the complete article on Financial Advisor IQ