For people who buy and sell securities every day, the IRS rules regarding wash sales can be complicated. Not complying with those rules is very risky. Less experienced investors may be unfamiliar with the term wash sales. These transactions happen when someone sells securities at a loss and then, within 30 days, buys them back, or buys very similar securities.

Here is a simple example. John Smith currently owns one hundred thousand shares of Global Oil which he sells at a loss of fifty thousand dollars on September fifteenth. On September thirtieth he buys back one hundred thousand shares of Global Oil which he then sells at a profit of seventy-five thousand dollars.

Ms. Doe is going to try to get a tax break on the one thousand dollar loss she experienced in the first sale. This is an effort to counterbalance the taxes she will owe on the profit she earned with the second sale.

The IRS says no. Since Mr. Doe repurchased the same securities within thirty days of the first sale, the IRS will tax him on the entire ten thousand dollar profit. Mr. Doe’s position in the security never really changed in the eyes of the IRS.

Although people buy and sell shares all the time and often deduct any losses they suffer, there is a thirty day rule. It is against the law to deduct losses for these transactions. You cannot deduct losses that occur when you sell shares in a company and then repurchase them, or similar ones, within 30 days.

Trying to get around tax laws is dangerous business. The IRS has strict rules when it comes to wash sales, and they enforce those rules. Investors should be very careful to comply.

Day traders often struggle to properly report their taxable profits to the IRS every year. The multitude of regulations to be followed and necessary paperwork can be truly overwhelming. And you definitely want to avoid a late filing! If you would like assistance with the process, or need online info, give TradeLog a try. They offer software to help with wash sale rule options and much more.