Locking In Stock Market Gains

I was thinking of titling this article something along the lines of “It’s not your father’s wash sale”, but I figured that would be too obtuse. The issue here is the possible combination or overlap of taking a gain on a stock and buying it back with an eye towards the wash sale rule. While a lot of people who invest have heard of the wash sale rule, many don’t realize that it applies only where you have a loss. That is, to oversimplify, if within the 30-day period before, or the 30-day period after, the sale of a stock in which you lock in a loss, you buy it back, then that loss is not immediately recognized, but rather kind of banked and saved for another time. However, that does not apply where you lock in a gain. In other words, you could sell a stock at a gain and buy it back one minute later – and you’ve locked in the gain, and you’ve started the clock ticking anew on the new position. 

So obviously a quick question may come up – why would you do that? One very good reason would be if you already had losses during the year, and you wanted to be able to take some gains at effectively no tax cost. You could do that by selling a stock at a gain to whatever extent you want to cause a recognized (realized) gain that would in turn be offset by already incurred (or possibly anticipated to be incurred) losses. And, you would buy it back because you still like the stock. Nowadays, with effectively for many stock transactions there being no transactional cost, it in turn costs you nothing to sell a stock and buy it back.

Why would you do that since any currently unused losses can be carried forward for quite a number of years (technically until you die), so that you would in that sense have no pressure to take a gain to offset losses. That is true at the federal level. However, using our home state of New Jersey as an example, New Jersey does not allow for losses. Thus, as an example, if you have stock market losses of $20,000, New Jersey won’t allow you to use any of them – except against taking gains in other stocks, and it must be within the same year. Thus, if you’ve already incurred some substantial losses in the stock market in a particular year, if you do nothing about it (in line with this article), for New Jersey purposes, those losses are wasted. On the other hand, if you were to sell some stocks at a gain, then for New Jersey purposes, that gain will be tax-free.

If you have any questions contact Kal Barson at kal@barsongroup.com