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I have a position in asset that I plan to hold for a long time. Currently its market price is on a downtrend and could possibly turn into a capital loss. I am not concerned about the near term price fluctuations.

At the same time, I notice that I can sell some of it at a price lower than my cost basis, which would generate a capital loss tax event. The idea is that this asset appreciates in value over time, surely this could fail, but is irrelevant to this discussion.

I also wouldn't be opposed to acquiring more of this asset at a lower price, eventually lowering my cost basis.

I feel like this has something to do with wash sale rules, or something similar but I'm not sure.

What I notice is that using the way the rules are written, I could lower my income tax burden by $3,000 now or more within the next 7 years (offsetting capital gains if I ever sell something at a profit), if I simply sold while market price is lower, even though I don't necessarily intend to realize capital gains on this particular asset.

Are there consequences or considerations I should make using this seemingly gimmicky way of lowering an income tax burden? Maybe some regulation against selling just enough to report a $3000 loss, while maintaining the rest of the position.

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    Note there is no free lunch here. If you sell now and take a $3000 capital loss, your basis resets. So if the stock goes back up, you will be liable for tax on $3000 more of capital gains than you would if you had not sold. In a sense, this doesn't really save you any money in taxes, it just pushes them into the future. – Nate Eldredge Oct 3 '14 at 15:07
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Note that the rules around wash sales vary depending on where you live.

For the U.S., the wash sale rules say that you cannot buy a substantially identical stock or security within 30 days (before or after) your sale.

So, you could sell your stock today to lock in the capital losses. However, you would then have to wait at least 30 days before purchasing it back. If you bought it back within 30 days, you would disqualify the capital loss event.

The risk, of course, is that the stock's price goes up substantially while you are waiting for the wash sale period. It's up to you to determine if the risk outweighs the benefit of locking in your capital losses.

Note that this applies regardless of whether you sell SOME or ALL of the stock. Or indeed, if we are talking about securities other than stocks.

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    You can first buy the next position and then sell, but you'll still have to wait the 30 days between the purchase and the sale – littleadv Oct 3 '14 at 15:34
  • okay, what with commodities or other volatile properties? – CQM Oct 3 '14 at 15:56
  • @CQM short sale rules are for any investment asset. Doesn't matter what class it is. – littleadv Oct 3 '14 at 21:55
  • @littleadv but we are talking about wash sales. looks like the IRS publication does make a distinction "They do not apply to losses from sales or trades of commodity futures contracts and foreign currencies." – CQM Oct 4 '14 at 0:48
  • @CQM these are explicitly excluded. But you asked about commodities, not futures. – littleadv Oct 4 '14 at 1:17
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When a question is phrased this way, i.e. "for tax purposes" I'm compelled to advise - Don't let the tax tail wag the investing dog.

In theory, one can create a loss, up to the $3K, and take it against ordinary income. When sold, the gains may be long term and be at a lower rate. In reality, if you are out of the stock for the required 30 days, it will shoot up in price. If you double up, as LittleAdv correctly offers, it will drop over the 30 days and negate any benefit. The investing dog's water bowl is half full.

  • its not a security. – CQM Oct 3 '14 at 16:09
  • Is it subject to the long term cap gain rate vs the short term ordinary income? – JTP - Apologise to Monica Oct 3 '14 at 21:40

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