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Investors: Avoid a ‘soaking’ on your tax losses

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It looks like the stock market is in for another bumpy ride this year. You can expect your fair share of losers as well as winners. At least you can use the capital losses to offset capital gains and up to $3,000 of ordinary income this year.

Warning: Don’t forget about the “wash sale”rule. This tax rule prevents you from deducting a loss from the sale of securities if you buy substantially identical securities within 30 days of the sale.

When are securities considered “substantially identical” for this purpose? Obviously, the wash sale rule applies to shares of common stock in the same corporation. It also includes shares of the same mutual fund. However, bonds issued by the same obligors aren’t always treated as being substantially identical. It depends on the bonds’ interest rates, the face amounts, the issue dates, the maturity dates, etc.

Even if you buy shares of the exact same stock or mutual fund, it doesn’t necessarily mean your losses will be washed away. If you’re careful, you can wring some tax benefits out of the deal.

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