How to Get Around the IRS Wash-Sale Rule

At an extreme, the wash-sale rule can mean that day traders who are in and out of the same securities over and over may be taxed on all their winning trades, without being able to subtract their losing trades for tax purposes. If your winning trades gained $300,000, and your losing trades cost you $200,000, you cleared $100,000 — but the IRS may tax you on the $300,000. Ouch!

There are ways around the wash-sale rule. The obvious solution is to qualify as a trader for IRS purposes and then take the mark-to-market accounting election.

Other methods for avoiding the wash-sale rule include trading a given security only once every 60 calendar days and doing all your trading within a qualified retirement account such as an IRA. Some securities are handled differently. Futures contracts are considered to generate investment income and losses, not capital gains. Profits on options contracts are 60-percent long-term capital gains and 40-percent short-term capital gains, which reduce the wash-sale rule effect.

If you have any more clever ideas about how you can make money without taking a tax hit, be sure to run them through an experienced tax pro first.

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