Wash Trading

finance a la shmoop what is the wash sale rule this is the way we wash our

taxable realized profits taxable realized profit technical realize [Person washing cash]

profits okay we're done the wash sale rule is all about realizing losses from

investments gone bad such that those losses offset the gains from investments

gone good so you've had a good year in stock market you made 200 grand in

profits owning a thousand shares of Amazon from eleven hundred bucks a share

about thirteen hundred bucks a share but the fundamentals we're starting to worry [Amazon stock price graph]

you and the price just got so high you couldn't stand the stress anymore so you

sold it all of it two hundred grand of profits long-term gain because he held

it over a year looked done cashed out so that was the good part of the year

here's the bad you also invested in crapcom you put three hundred grand into [Cows butts appear]

the company at thirty bucks a share the stock stands today at ten bucks a share

while you show a paper loss of conveniently for this problem two

hundred grand you really don't love paying taxes have yet to meet a [Woman approaches politician]

politician who didn't make you feel like you need a hot shower right after so you [Women shake hands]

consider your options to mitigate your tax bill you could do nothing and pay

full taxes on the two hundred grand you made on ticker AMZN and your two hundred

in gains would net you about a hundred twenty grand after tax in a blue state [After tax profits appear]

painful to lose that forty percent of your dough that way you make a note to

yourself to rethink the wisdom of living in the high tax blue state you know

Florida in Texas looking pretty good now huh but you do have another option you

can just sell crap.com and take the loss or realize that loss and that loss of

200 grand will directly fully offset the two hundred grand of Amazon gains

well you'd be then break-even and guess what no taxes yeah but then you wouldn't

own the ten thousand shares of crapcom you wanted to own at ten bucks well if [Woman stood beside sacks of stocks]

you just sold them and then the next day bought them back you'd be good right no

well yeah it took us a long time to get here but that's where the wash sale rule

comes in that is one sale to realize losses can't just wash the sale of a [IRS agent walks up to woman holding stocks]

realized gain the IRS kind of fussy that way so

if you do sell to realize a loss that offsets again you can't just buy back

the shares the next day well but what if there were two types of craft Comstock [Box falls over]

like crap a and crap B where there were a hundred percent alike in every single

way with one and only one exception crap B is founder shares which carry ten

votes for every one of crap a and usually those traded a slight premium

like ten dollars and twenty cents this year maybe something like that

and yes the founder was paranoid about losing control over his company like [Cat hissing]

Zuck so he demanded the separate share class and then he sold his shares to buy

a yacht and attract a new wife and well now his B shares are traded in the

market and they trade for a twenty cents a share more expensive than the a shares

so not really a big deal could you sell the a shares you owned and then just buy

the B shares of crapcom the next day would that then not violate the wash [Investor walks to day 2 on timeline]

sale rule sadly no again because the shares have

to be of a completely different security that you go and buy and they can't be

just simply another class or letter grid of the same economic interest of that

share so how do you get around the wash sale rule well you don't you have to

more or less do nothing ie sit on your positions and not on the ten thousand [Person sits on a chair]

shares of crapcom for thirty days once those thirty days

have passed you can then buy crap.com and who [Woman holding 10,000 shares]

knows it may be even lower than the ten bucks a share at which you sold it maybe

nine maybe eight maybe a double that's at twenty now and you're bumming out

because you sold for tax loss reasons and maybe you shouldn't have and that's

just how the market works you roll the dice and you pay the price right that's [Dice roll on floor]

pretty much it that's the wash sale rule the second rule of course is that you do

not talk about the wash sale rule [Bar of soap appears]