Stock Wash-Sale Rule

The Stock Wash-Sale Rule is a regulation set by the Internal Revenue Service (IRS) that prevents taxpayers from claiming a Tax Deduction for a loss on a sale of Stock if they repurchase the same or substantially identical Stock within 30 days before or after the sale. This rule aims to prevent taxpayers from taking advantage of Tax Deductions while effectively maintaining their investment positions.

Examples:

• If an investor sells 100 Shares of Company A for a loss on January 1 and buys back 100 Shares of Company A on January 15, the loss from the sale is disallowed for tax purposes due to the wash-sale rule.
• If an investor sells 50 Shares of Company B on February 1 at a loss and then purchases 50 Shares of a different but similar Stock, the wash-sale rule does not apply since the Stock purchased is not substantially identical.

Cases:

• In the case of Hillebrand v. Commissioner, the taxpayer attempted to deduct a loss from a Stock sale but was denied due to the wash-sale rule, as they repurchased the same Stock within the specified timeframe.
• In Watt v. Commissioner, the court upheld the IRS’s disallowance of a loss because the taxpayer bought back substantially identical Stocks, confirming the enforcement of the wash-sale rule.