Wash sales and Tax loss harvesting
After you have decided which investments to sell to realize losses, you'll have to determine what new investments, if any, to buy. Be careful, however, not to run afoul of the wash-sale rule.
The wash-sale rule states that your tax write-off will be disallowed if you buy the same security, a contract or option to buy the security, or a "substantially identical" security, within 30 days before or after the date you sold the loss-generating investment.
One way to avoid a wash sale on an individual stock, while still investing in the industry of the stock you sold at a loss, would be to consider substituting a mutual fund or an exchange-traded fund (ETF) that targets the same industry.
In next blogpost, we will discuss how to make tax loss harvesting part of your year round tax and investing strategies.