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Step 1
Look at your portfolio. If you have a stock, option or contract and you are losing money on it, you may want to sell it before the losses are extended. Selling the instrument at a loss is the first phase of entering into a wash sale. You must actually be losing money to fulfill the first rule of a wash sale.
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Step 2
Sell the stock or contract and record a loss. The benefit here is that for tax purposes you can reduce your taxable income by deducting your stock loss. It doesn’t matter when you initially bought the stock, but it does make a big difference when the sale of the asset occurs.
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Step 3
Replace the stock. Buy back the same or similar stock to essentially hold on to what you have, even though you previously sold it to take a loss. The reason you might do this is if you believe the stock will come back in value, and this will help you from having any actual losses minus the trading fees. You have essentially now entered a wash sale.
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Step 4
Look at the sales and compare to the rules the IRS provides on Publication 550. The rules state that if you have a loss and replace the stock you sold with that same or similar stock within 30 days, it is a wash. It is a wash even if you preemptively bought the replacement stocks within 30 days before the sale of the stocks that had the loss..
