Avoiding the wash-sale rule

October 9, 2009

My investment portfolio has declined significantly in the last 18 months. Are there any tax benefits owed to me?

Q: My investment portfolio has declined significantly in the last 18 months. Are there any tax benefits owed to me?

A: When you sell investments at a gain, you generally pay taxes on the capital gains. Conversely, when you sell at a loss, you can force the IRS to give you a tax break. Short-term gains, or investments you've held for one year or less, can only be offset with short-term losses. Long-term gains, or investments held for more than one year, can only be offset with long-term losses. Under federal tax laws, you can force the IRS to provide you with up to a $3,000 annual deduction from your income if you've suffered investment losses.

Be aware that the IRS discourages you from locking in your losses and buying back the same or substantially identical investment through its "wash-sale" rule, which holds that selling and buying within 61 days voids your loss. One of the best ways to avoid the wash-sale rule is to replace your investment with something similar, rather than the "same or substantially identical" investment.