Wash Sale: What Happens if You Buy a Stock You Just Sold

A little tax theory

Taxes are posed for the profit that you made with your investments and it’s counted for the period of one year. During this period all your profits and losses in a taxable account are summarized and the tax is calculated for the final sum. Common sense tells us: if you sell something at a loss, then you deduct it from the overall taxable profit and pay less taxes. True. 

A little trick

To understand the essence of the wash-sale rule, I would need to explain why it has emerged. 

The scheme to decrease taxes was the following: at the end of a period you could have sold some underperforming stocks, state a loss and decrease taxable profit, and a couple days later you would have bought it because you still see the growth potential and want to earn on it in the following period. Then you repeat it again, maybe with a different asset. So in essence, you state an artificial loss to get tax benefits, when in reality you hold the asset most of the time and earn with it. 

Not-so-little implications

The IRA are also smart guys that put a limit on these kinds of manipulations by introducing the wash-sale rule. It states that if you buy the same or "substantially identical" security 30 days before or after the sale, it still will be accounted for in taxes. 

Ok, it’s clear and super simple for stocks. 

Example: If you sold your GameStop shares because you read about the upcoming recession and then decided to buy because you heard they are opening their own NFT marketplace, you CAN do it. It’s just you won’t be able to claim losses on the first deal. Or you could survive the 30-day window. 

Where timing matters more is in options trading. You found a perfect PUT on SPY because you know with QT the market is going down. You sold it because the RSI went up, but then it went down and you really want to buy PUT again. You CAN do it, but you won’t be able to claim losses on the first deal. 

Unfortunately, it applies to all types of securities: stocks, bonds, options, ETFs and mutual funds.

Tips to avoid the wash-sale

❌ Sell an investment at a loss in a taxable account, and then buying it back in a tax-advantaged account.
❌ Ask your partner to buy the same stocks.
❌ Buy the same securities from a different broker.
❌ Sell SPDR S&P500 ETF Trust (SPY) and buy Vanguard S&P500 ETF (VOO). Yes, these are considered ‘substantially identical’ tools. 

✅ If you absolutely can’t wait 30 days to buy back what you have sold and still want to get tax benefits, consider finding something that resembles your security. Gainy’s new instrument, TTF (Thematic Trading Fractional) collections aka synthetic ETFs, can help with this. 

For example, if you’ve recently sold S&P 500 or a specific stock, you can

• Go bigger, i.e. buy a general US market ETF
• Buy S&P 500 in separate TTFs in Gainy (for example, Energy TTF, Tech TTF, Financial TTF, etc.)
• If it’s a stock of one company, buy a TTF with this company. The advantage of a TTF is that it doesn’t have hundreds of companies that dilute the overall returns, but only the leading companies in the sector, which usually account for the majority of the yield.

Conclusion

The general rule of long-term investing — HOLD. So selling at loss is not recommended unless really necessary because your decisions are value-driven. 

The general rule of short-term investing and trading — LIMIT LOSSES. Because it’s all about capital turnover and protraction burns your potential yield. 

So there is no one universal piece of advice here, except for picking stocks for your risk profile and goals and just stick to your strategy. Gainy can make it easy and help you pick trends to invest in.