What Happens in a Wash Sale and How to Avoid the Rule?

The wash-sale rule is a relatively strict IRS regulation that effectively prevents people from taking a tax deduction. Although it can be a bit complicated for beginners, the rule defines a wash sale as one that occurs when someone sells or trades at a loss and, within 30 days before or after this sale, buys an identical stock or security, or acquires a contract or option to do so.

Example

Let's say you buy 100 shares of AA pharmaceutical stock on December 1 for $10,000. Later on December 15, the value of the 100 shares has dipped to $7,000, so you sell the position to get a capital loss of $3,000 for tax deduction purposes. Later the same year, by the end of December, you repurchase the 100 shares of AA pharmaceutical stock back again to re-establish your position in the stock. The initial loss will not be counted as a tax loss since the security was repurchased within the limited time interval.

Possible Strategy

I have a strategy to avoid the rule while still taking advantage of taxable gains and losses, so I think it can help.

If you own an individual stock that has recently experienced a fall, you can effectively avoid a wash sale by making another purchase of the same stock and later waiting at least 31 days to sell the same shares that have dipped. Keep in mind that this strategy's potential drawback is that you can increase your exposure to a given sector and significantly increase your risk.