We no longer support this browser. Using a supported browser will provide a better experience.

Please update your browser.

Close browser message

Investing

For your year-end tax planning, beware the wash sale rule

Tax-loss harvesting can help you offset capital gains. But only if you do it properly.


As the end of the year approaches, it is wise to consider how you might save on your tax bill using a strategy known as “tax-loss harvesting.”

This strategy—which can be particularly powerful when markets have been volatile—involves realizing capital losses with the intention of using them to offset your realized capital gains, thereby lowering your tax bill for the year.1

There can be significant benefits to harvesting losses. But make sure you do not run afoul of the so-called “wash sale” rule, which can be complicated to navigate. Thus, be mindful of common pitfalls to avoid disrupting your careful planning.

What is the wash sale rule?

The wash sale rule prohibits taxpayers from claiming a loss on the sale or other disposition of a stock or securities if, within the 61-day period that begins 30 days before the sale (generally, the trade date) or other disposition, they:

  • Acquire the same or a “substantially identical” stock or securities, or
  • Enter a contract to acquire stock or securities (e.g., call options)

The wash sale rule also applies to short sales.2

The wash sale rule exists to prevent taxpayers from taking losses (thus lowering their tax bill) when they are not economically out of a particular position for a sufficient period of time.

Consequences of running afoul of the wash sale rule can be significant:

  • The loss from the sale of the original shares is disallowed
  • The amount of the disallowed loss is added to the basis of the newly acquired shares, and realized only when the newly acquired position is sold
  • Additionally, the taxpayer’s holding period on the original shares is added to the holding period of the newly acquired shares

To illustrate:

On June 1, 2022, Tom sold 100 shares of ABC stock for $100 a share, initially purchased for $110 each. He held the shares for more than one year (long-term). Thus, his capital loss was $1,000 (100 shares @ $10 per share). On June 10, 2022, Tom repurchased 100 shares of ABC stock for $105 a share. Since the wash sale rule applies:

  • The $1,000 loss would be disallowed.
  • The $1,000 would be added to the cost basis of the new shares, and the new cost basis would be $115 per share ($105 per share + $10 per share disallowed loss).
  • These newly purchased shares are considered to be held long-term because of the holding period of the original shares.


How the wash sale rule works

When does the wash sale rule apply?

The wash sale rule applies to transactions in stock or securities, including debt securities, and contracts to acquire stocks or securities.

This includes, for example, warrants, convertible preferred stock and options contracts.  It is not clear, however, whether the rule covers some common financial instruments, such as equity swaps. So, you must work closely with your tax advisor to confirm whether or not a particular transaction may give rise to a wash sale. 

Another key determination is whether two securities are “substantially identical”; but, the wash sale rule uses this term without precisely defining it. Ultimately, a taxpayer must consider the economics of the two positions. (Again, with the assistance of your tax advisor.)

One widely cited case suggests a taxpayer should ask, generally, whether a knowledgeable investor, fully armed with all relevant facts, would discern a sufficiently material economic difference between two positions such that her decision making would prejudice her towards one position over the other.3

If the answer to this question is “no,” the two positions are likely substantially identical—and, therefore, the wash sale rule could apply, even though the pair of transactions involved two different securities.

Unfortunately, there is no bright line test and the determination of what is substantially identical requires an analysis of the specific facts and circumstances. For example, for two debt securities of the same issuer not to be considered identical, the securities’ other features (e.g., coupon, maturity, call features, degree of subordination, etc.) would have to be different enough that they created a difference in the economics of the two positions. 

In applying the wash sale rule, you should also be aware of trading activity in your other accounts.  The wash sale rule could apply to transactions in any account you (or related parties) have with another financial institution, including retirement accounts; accounts held by your disregarded entity (e.g., single member LLC) or grantor trust; or accounts held by your spouse.

Make sure to also watch out for vesting and the exercise of compensatory options or restricted stock grants and automatic dividend reinvestments, which qualify as the acquisition of stock for purposes of the wash sale rule.

What types of transactions could trigger the wash sale rule?

Always consult your tax advisor before you engage in transactions that might be considered a wash sale. However, it can be helpful to understand where the rule could apply.




Alternatively, if you want to hold the same stock or securities and do not want to be out of the market for an entire month, you can “double up” on your position. For example, buy the identical position at the current price by November 29, wait 30 days, then sell the original loss position on Friday, December 30, and potentially recognize the loss this year.

We can help

All of your tax moves should be thoroughly discussed with your tax advisors.

While J.P. Morgan does not provide legal or tax advice (and cannot opine on whether a particular transaction is a wash sale), your J.P. Morgan team can help you and your tax advisors assess potential tax-loss harvesting opportunities. You may also benefit from having a so-called “separate, tax-managed account”—i.e., one designed to continuously look for losses and harvest them when opportunities arise. 

To learn more about our capabilities, please contact your J.P. Morgan advisor.

 

1.Please consult your tax advisor to see if tax-loss harvesting is available with your accounts, and how potential buybacks may be done successfully. Taxes should not be the only factor to drive an investment decision.
2.U.S. Internal Revenue Code, Section 1091.
3.Hanlin v. Comm’r, 108 F.2d 429 (3d Cir. 1939).
4.The wash sale rule does not currently apply to direct investment in assets other than stock or securities, including commodities (such as allocated gold), currencies or digital assets (such as cryptocurrency).  Recent proposals in Congress to expand the scope of assets subject to the wash sale rule beyond “securities” did not pass. So at this time, the wash sale rule still does not apply to certain assets that historically fall outside its scope.


IMPORTANT INFORMATION

Investment trends may not materialize. Sustainable Investing and investment return are not always aligned, and may lose value.

This material is for informational purposes only, and may inform you of certain products and services offered by J.P. Morgan’s wealth management businesses, part of JPMorgan Chase & Co. (“JPM”). Products and services described, as well as associated fees, charges and interest rates, are subject to change in accordance with the applicable account agreements and may differ among geographic locations. Not all products and services are offered at all locations. If you are a person with a disability and need additional support accessing this material, please contact your J.P. Morgan team or email us at accessibility.support@jpmorgan.com for assistance. Please read all Important Information.


Check the background of Our Firm and Investment Professionals on FINRA's BrokerCheck

To learn more about J. P. Morgan’s investment business, including our accounts, products and services, as well as our relationship with you, please review our  J.P. Morgan Securities LLC Form CRS and  Guide to Investment Services and Brokerage Products.

This website is for informational purposes only, and not an offer, recommendation or solicitation of any product, strategy service or transaction. Any views, strategies or products discussed on this site may not be appropriate or suitable for all individuals and are subject to risks. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation. 

This website provides information about the brokerage and investment advisory services provided by J.P. Morgan Securities LLC (“JPMS”). When JPMS acts as a broker-dealer, a client's relationship with us and our duties to the client will be different in some important ways than a client's relationship with us and our duties to the client when we are acting as an investment advisor. A client should carefully read the agreements and disclosures received (including our Form ADV disclosure brochure, if and when applicable) in connection with our provision of services for important information about the capacity in which we will be acting.

INVESTMENT AND INSURANCE PRODUCTS ARE: • NOT FDIC INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES • SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Equal Housing Opportunity logo

J.P. Morgan Chase Bank N.A., Member FDIC Not a commitment to lend. All extensions of credit are subject to credit approval 

J.P. Morgan Wealth Management is a business of JPMorgan Chase & Co., which offers investment products and services through J.P. Morgan Securities LLC (JPMS), a registered broker-dealer and investment advisor, member FINRA and SIPC. Annuities are made available through Chase Insurance Agency, Inc. (CIA), a licensed insurance agency, doing business as Chase Insurance Agency Services, Inc. in Florida. Certain custody and other services are provided by JPMorgan Chase Bank, N.A. (JPMCB). JPMS, CIA and JPMCB are affiliated companies under the common control of JPMorgan Chase & Co. Products not available in all states.

Please read additional Important Information in conjunction with these pages.