Wash Sale Rules for Mutual Funds

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To discourage the practice of traders selling stocks, and then repurchasing them to take advantage of tax losses, the Internal Revenue Service (IRS) has wash sale rules to govern these activities.

Rules

Wash sale rules apply to stocks, options and mutual funds for the 30 days before and 30 days after investments are sold and repurchased.

Definition

The IRS prohibits deductions on losses of "substantially identical" of investments.

Caution

The rules, as they apply to mutual funds, are not as clear as for stocks, so it is advisable to document your reasoning for when repurchasing as a precaution.

Benefits

Although you cannot take a deduction on losses within this period, you can defer the loss against future capital gains using line items on Schedule D of Form 1040.

Caveat

The 30-day rules apply to automatic repurchases, so examine your portfolio before taking the loss on your taxes.

Details

If you purchase the same stock at different times throughout the year, such as 10 shares in January and 10 in March, the rule applies to 20 shares dated from March. They are substantially identical.

Advice

When in doubt, consult with your tax advisor before taking deductions on losses from sales of mutual funds.

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