ShmoopTube

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finance a la shmoop what is the wash sale rule this is the way we wash our

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taxable realized profits taxable realized profit technical realize [Person washing cash]

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profits okay we're done the wash sale rule is all about realizing losses from

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investments gone bad such that those losses offset the gains from investments

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gone good so you've had a good year in stock market you made 200 grand in

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profits owning a thousand shares of Amazon from eleven hundred bucks a share

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about thirteen hundred bucks a share but the fundamentals we're starting to worry [Amazon stock price graph]

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you and the price just got so high you couldn't stand the stress anymore so you

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sold it all of it two hundred grand of profits long-term gain because he held

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it over a year looked done cashed out so that was the good part of the year

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here's the bad you also invested in crapcom you put three hundred grand into [Cows butts appear]

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the company at thirty bucks a share the stock stands today at ten bucks a share

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while you show a paper loss of conveniently for this problem two

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hundred grand you really don't love paying taxes have yet to meet a [Woman approaches politician]

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politician who didn't make you feel like you need a hot shower right after so you [Women shake hands]

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consider your options to mitigate your tax bill you could do nothing and pay

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full taxes on the two hundred grand you made on ticker AMZN and your two hundred

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in gains would net you about a hundred twenty grand after tax in a blue state [After tax profits appear]

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painful to lose that forty percent of your dough that way you make a note to

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yourself to rethink the wisdom of living in the high tax blue state you know

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Florida in Texas looking pretty good now huh but you do have another option you

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can just sell crap.com and take the loss or realize that loss and that loss of

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200 grand will directly fully offset the two hundred grand of Amazon gains

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well you'd be then break-even and guess what no taxes yeah but then you wouldn't

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own the ten thousand shares of crapcom you wanted to own at ten bucks well if [Woman stood beside sacks of stocks]

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you just sold them and then the next day bought them back you'd be good right no

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well yeah it took us a long time to get here but that's where the wash sale rule

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comes in that is one sale to realize losses can't just wash the sale of a [IRS agent walks up to woman holding stocks]

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realized gain the IRS kind of fussy that way so

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if you do sell to realize a loss that offsets again you can't just buy back

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the shares the next day well but what if there were two types of craft Comstock [Box falls over]

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like crap a and crap B where there were a hundred percent alike in every single

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way with one and only one exception crap B is founder shares which carry ten

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votes for every one of crap a and usually those traded a slight premium

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like ten dollars and twenty cents this year maybe something like that

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and yes the founder was paranoid about losing control over his company like [Cat hissing]

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Zuck so he demanded the separate share class and then he sold his shares to buy

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a yacht and attract a new wife and well now his B shares are traded in the

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market and they trade for a twenty cents a share more expensive than the a shares

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so not really a big deal could you sell the a shares you owned and then just buy

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the B shares of crapcom the next day would that then not violate the wash [Investor walks to day 2 on timeline]

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sale rule sadly no again because the shares have

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to be of a completely different security that you go and buy and they can't be

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just simply another class or letter grid of the same economic interest of that

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share so how do you get around the wash sale rule well you don't you have to

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more or less do nothing ie sit on your positions and not on the ten thousand [Person sits on a chair]

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shares of crapcom for thirty days once those thirty days

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have passed you can then buy crap.com and who [Woman holding 10,000 shares]

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knows it may be even lower than the ten bucks a share at which you sold it maybe

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nine maybe eight maybe a double that's at twenty now and you're bumming out

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because you sold for tax loss reasons and maybe you shouldn't have and that's

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just how the market works you roll the dice and you pay the price right that's [Dice roll on floor]

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pretty much it that's the wash sale rule the second rule of course is that you do

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not talk about the wash sale rule [Bar of soap appears]

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