Generally if you sell stock at a loss, you're able to claim a capital loss on your taxes to offset other gains from selling investments or even a certain amount of ordinary income. If you're selling and buying back the same stock within a certain amount of time, though, special rules can apply.
You generally can't take a capital loss if you sell securities and buy the same securities within 30 days, in either direction, of the sale. You can, however, add the amount of the loss to the cost basis of the bought stock so it may save you on taxes in the long run.
Tax Implications of Selling Stock and Buying It Back
Normally when you sell stock or other investments, such as real estate, you claim a capital gain or loss on the sale when you file your taxes. The amount of your loss or gain is the amount you got for selling the stock, after including any commissions, minus the amount you paid for it including commissions. That latter number is known as your cost basis for the stock.
If the stock went up in value, you pay capital gains tax, and if you've owned it for a year or longer, the tax on the stock sales is at the long-term capital gains rate, typically lower than your ordinary income rate.
If the stock went down in value, you can claim a capital loss, which you can use to reduce your total capital gains. You can also deduct up to $3,000 in excess capital losses from ordinary income and carry over remaining losses to subsequent tax years.
If you sell a security and buy the same stock or one similar within 30 days before or after the sale, though, the Internal Revenue Service wash sale rule kicks in. The wash sale rule effectively says that you don't get to claim a capital loss for the sale of the stock. Instead, the loss is added to the cost basis of the newly purchased stock, which will let you pay tax on a smaller gain or claim a larger loss when you finally sell the stock for good.
For example, if you initially bought $1,000 worth of stock, then you sell it for $750, both after commissions, you could ordinarily claim a capital loss of $250. But if two weeks later you see prices rising and buy the stock again for $900, that loss is instead added to your new cost basis. The cost basis of the shares is now $1,150.
Additionally, the amount of time you own the stock for determining whether you have a long- or short-term capital gain goes back to the original purchase date, not the new one.
Other Consequences for Frequent Trades
If you're frequently buying and selling the same stock, you may also encounter Financial Industry Regulatory Authority day trader rules. These generally say if you buy and sell the same stock more than four times in five business days in a margin account, you can be classified as a pattern day trader and required to keep at least $25,000 in your account on any days where you're day trading and for two business days afterward.
These rules don't directly affect your tax liability, but they can be something to keep in mind if you plan on selling and buying back the same stock.
Consequences of the 2018 Tax Law Changes
Under 2018 tax law, capital gains tax brackets are changing only slightly from previous years, but ordinary income tax brackets are generally decreasing in tax burden while the standard deduction is increasing. This may influence your decisions about whether to avoid loss sales in order to minimize your tax on stock sales.
Tax Law in 2017
For the 2017 tax year, ordinary income tax brackets are generally higher than those in 2018, and capital gains tax brackets are determined based on your ordinary income bracket.
- IRS: Publication 550 (2017), Investment Income and Expenses
- Investopedia: Wash-Sale Rule
- Charles Schwab: A Primer on Wash Sales
- FINRA: Day-Trading Margin Requirements: Know the Rules
- Marketwatch: Hey Day Traders: Here are Some Tax Strategies for You
- Forbes: forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/
- Day Trading For Dummies; Ann C. Logue
- The Compleat Day Trader, Second Edition; Jake Bernstein
- Comstock/Comstock/Getty Images