Friday, February 13, 2009

When are stocks "substantially identical"?

A wash sale occurs when one sells stock or securities at a loss and then within 30 days before or after the sale buys or acquires in a fully taxable trade, or acquires a contract or option to buy substantially identical stock or securities. The disallowed loss can be added to the basis of the new stock or security. Bonds or preferred stock of a corporation are not ordinarily considered substantially identical to the common stock of the same corporation.

However, I do not see any clear definition of "substantially identical" stocks. The Pub 550 from IRS presents examples of what is not identical and leaves enough room for wannabe lawyers to craft their class actions (.. or its analogy in the finance world.)
Ordinarily(!), I revere the information-burst from the IRS website, but this is one document clearly begging for more ink.

Excerpt from thestreet: That's why you can't avoid the wash-sale rule by selling stocks at a loss in a brokerage account and repurchasing the same shares in an IRA?
uh. really?

The MER-BAC days.
IRS Publication 550, Investment Income and Expenses.
Tax Loss harvesting - good read!

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