Tom Has Some Good Advice for Investors
Transcript:
Katie Nealis: So another question we have is, what is a wash sale?
Tom Vaughan: Ah, okay. So this is actually kind of a hot subject right now, it’s come up a fair number of times in the news because of what happened last year. So essentially, a wash sale just means that if I own Apple, and I sell apple and let’s say I take a loss, I cannot buy back Apple for 31 days, or 30 days, I can buy it back on the 31st day without negating the loss that I took. So if I bought it at 100, and sold it at 90, and if I buy it right back, I don’t get the write off, it becomes part of my cost basis, but I don’t get the write off. So I have to not be in that for 31 days, this is something they did way back. And you can go to another, you know, I can go into Microsoft during that period of time, without any problem. But what happens, I give you just one example.
So it was a great story. wasn’t great for the gentleman, but it was a gentleman, first time investor last year gets excited $40,000 give or take opens up, you know, an online account is buying and selling I mean, literally hundreds of transactions even a month, at the end of the year, ends up with $50,000 I made $10,000. So at least it was profitable. But he kept trading the same security over and over again. And so he actually had 800, you know, basically $790,000 $810,000 worth of gains and $800,000 worth of losses. But he did not get to count the losses, because he didn’t wait the 31 days. And so you know, he was stuck. By the time he got to do his tax return, he realized he was going to hold out $160,000 in federal taxes alone. And that’s really hard to unwind. And it gets a little bit complicated, but it is super important to understand how wash sales work so you don’t end up in that situation where you think you’re going to get a write off because he should have just had a $10,000 gain ended up with an $800,000 gain. And that’s just because he wasn’t paying attention or didn’t know about the wash sale rule.