The stock market has had a wild ride in 2020, and with three months left in the year, there’s no guarantee that there won’t be even more craziness to come.
As the end of the year approaches, more people will start looking at tax planning in order to pay as little as possible to Uncle Sam in early 2021.
One great way to cut your tax bill is to harvest tax losses. However, investors never like to sell a stock when its price is low, especially if they think that it can bounce back. What you’d like to do is sell the stock, take the loss, and then immediately buy it back so you can own it when it recovers.
Can you do that? Unfortunately, the answer is usually no. That’s because of what are known as the wash sale rules — what could be the most important tax rules for investors in 2020.
Why Wash Sales Are A Problem
One of the biggest benefits of the U.S. tax laws is that most taxpayers don’t have to recognize any increase in the value of their investments until they actually sell them. No matter how high a stock price goes, you’re in the clear from a tax perspective as long as you don’t cash out. Sell the shares, though, and you’ll trigger a big capital gain that could send your tax bill higher.