You've got that backwards. You can ignore the wash sale all year long and trade as often as you want, booking gains and/or losses. At the end of the year, the net carry forward wash sale loss is the issue. If you want to deduct it this year, you cannot re-establish the same position for 31 days after booking that loss otherwise you lose it for the current tax year and must carry it forward.
Wash sales
- Thread starter invortex
- Start date
You've got that backwards. You can ignore the wash sale all year long and trade as often as you want, booking gains and/or losses. At the end of the year, the net carry forward wash sale loss is the issue. If you want to deduct it this year, you cannot re-establish the same position for 31 days after booking that loss otherwise you lose it for the current tax year and must carry it forward.
One way to avoid the wash sale problem is to set up an entity and elects IRS 'Trader in Securities' status. To qualify, your entity needs to do a relatively large volume of trades on a yearly basis. Under this rule you can enjoy the benefits of Mark to Market accounting and completely do away with the wash sale insanity.
I wish the US would get rid of this wash sale nonsense on stocks. The tax code does not necessitate it for futures contracts.
Of course, why wouldn't they? Maybe I misunderstand your question.
If you want a simple solution, just sell SOXL, take a loss and buy 2x or 3x SOXX and hold for at least 31 days. Then 35 days later, you can close SOXX and re-purchase your previous position if you want.
There's another recent thread on here about wash sales. Wealthfront and other robo-investors sell losing positions and replace with substantially similar all the time to realize losses and reduce tax burdens as much as possible. It seems that the incredibly vague words "substantially similar" is the achilles heel of the wash sale rule. The problem is that it's not objective enough to enforce which explains why there are investment managers advertising about how they exploit the rule in order to defer taxes.
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That's because the tax code is rigged against the investor aside from the preferential treatment of long-term capital gains. If there is a wash sale rule applied to losses, why not also gains? Additionally, if we are only allowed to write off $3k per year of losses with the remainder carried forward, why aren't we only taxed on no more than $3k per year of realized gains with the rest carried forward? The situation won't get any better. Government is broke. Just wait until they start going after unrealized gains in non-tax-sheltered accounts.
That's a big "aside." Long-term holdings compound tax-deferred till sale. The real injustice is sky-high Federal / state tax rates on ordinary income.
The 3k loss is ridiculous.
If you look at the wash sale and straddle rule - they were designed to remove loopholes in the code which is probably a good thing.
I think the $3k loss limit is to protect the government. In a really bad year like 2008, being able to write off all of one's losses could result in a huge drop in tax revenue from the government's perspective.
Being able to swap out one ETF for another with 99% the same exposure to get around the wash sale rule makes the rule pretty ineffective. As others have pointed out, why no similar rule for futures?
One could make an argument that ordinary income earned by working for someone else (a job) should be taxed at a higher rate than capital gains. Reason being is that investing in a company should allow the company to grow and create more opportunity for others by providing more jobs and services to the public. When someone works for a company, they are effectively removing a job from the job market and, carried to the logical extreme, assuming that there are others capable of performing the job, depriving someone else of the job that one is occupying. If the income is earned through a business that hires other people, one could argue that the tax rate should be effectively lower to encourage more people to provide services and hire others. That's part of the reason why businesses enjoy a lot of tax breaks. The counter-argument to that argument is that such a practice would grow income inequality.
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Isn't that exactly what I said?