Watch out for wash sales

In today's market conditions, many of us are selling stocks or mutual fund shares at a loss.  When you find yourself in this situation, it pays to be aware of the rules for "wash sales."

A wash sale occurs when you sell a stock, bond, or mutual fund and buy the same or a substantially identical security within 30 days before or after the sale.  When this happens, you're barred from deducting a tax loss on the sale.  Instead, your cost basis of the new security is increased by the loss.

Example.  Say you sell 100 shares of XYZ mutual fund at a loss of $3 per share.  A week later, you regret your decision and buy another 100 shares of XYZ fund. Your original loss of $300 will be disallowed, and you'll add the $300 to your cost basis in the new shares.

Beware this trap.  Also be aware of a possible trap if you use an automatic purchase plan or dividend reinvestment plan.  If these plans cause you to acquire more shares of a stock or fund within 30 days of a sale, the wash sale rules will apply to your sale.

How can you avoid a wash sale?  You can avoid a wash sale if you make your purchase more than 30 days before or after the sale date.  Also, you can buy shares in a different but similar stock or mutual fund without triggering a wash sale.