How do you avoid a wash sale? Well, first of all, why would you want to sell an investment for a loss? This is a big topic this year because the stock market has not been great for a lot of people's investments. And one of the major reasons that people sell investments for a loss is because they want to take advantage of the tax deduction. The way our tax system works is that if you have an investment and have a gain in it, when you sell that investment, you owe taxes on that gain.
But it works the opposite way when you have a loss and you get a deduction because you lost money on an investment. However, there is a catch. The IRS defines a wash sale as when you sell an investment and buy it back within 30 days. In that case, the IRS does not let you take the tax deduction. But here's a tip for you if you want to avoid that problem.
If you own index funds, it's okay to sell one of those index funds and then buy a different one that's exposed to the exact same index. So for example, if it's a year like this year, where your Vanguard S&P 500 fund might be down 20%, you can sell your Vanguard S&P 500 fund, take that loss and buy back the Charles Schwab S&P 500 fund and maintain your portfolio's correct exposure without triggering the wash sale rule.
Please note that the information contained on this page is for educational purposes only and should not be considered tax advice. Any calculations are intended to be illustrative and do not reflect all of the potential complexities of individual tax returns. To assess your specific tax situation, please consult with a tax professional.