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Finance: What is the Wash Sale Rule? 14 Views


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Description:

check out some practical examples of inflation. And no, there are no balloon animals in this video. Sorry.

Language:
English Language

Transcript

00:00

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

00:09

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

00:13

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

00:18

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

00:24

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

00:29

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

00:33

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

00:36

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

00:41

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

00:45

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

00:50

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

00:55

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

00:59

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

01:03

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

01:06

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

01:11

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

01:15

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

01:20

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

01:24

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

01:28

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

01:32

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

01:36

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

01:41

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

01:46

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

01:50

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

01:55

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

02:00

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

02:04

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]

02:11

realized gain the IRS kind of fussy that way so

02:15

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

02:20

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

02:25

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

02:29

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

02:34

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

02:38

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

02:41

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

02:45

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

02:49

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

02:53

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

02:57

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

03:02

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

03:06

sale rule sadly no again because the shares have

03:09

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

03:13

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

03:17

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

03:21

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

03:27

shares of crapcom for thirty days once those thirty days

03:31

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

03:35

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

03:39

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

03:42

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

03:47

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

03:50

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

03:54

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

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