Individual Tax briefs

The “wash sale” rule: Don’t let losses circle the drain

Stock, mutual fund and ETF prices have bounced around lately. If you make what turns out to be an ill-fated investment in a taxable brokerage firm account, the good news is that you may be able to harvest a tax-saving capital loss by selling the loser security. However, for federal income tax purposes, the wash sale rule could disallow your hoped-for tax loss.

Rule basics

A loss from selling stock or mutual fund shares is disallowed if, within the 61-day period beginning 30 days before the date of the loss sale and ending 30 days after that date, you buy substantially identical securities.

The theory behind the wash sale rule is that the loss from selling securities and acquiring substantially identical securities within the 61-day window adds up to an economic “wash.” Therefore, you’re not entitled to claim a tax loss and realize the tax savings that would ordinarily result from selling securities for a loss.

When you have a disallowed wash sale loss, it doesn’t vaporize. Instead, the disallowed loss is added to the tax basis of the substantially identical securities that triggered the wash sale rule. When you eventually sell the securities, the additional basis reduces your tax gain or increases your tax loss.

Example: You bought 2,000 ABC shares for $50,000 on May 5, 2024. You used your taxable brokerage firm account. The shares plummeted. You bailed out of the shares for $30,000 on April 4, 2025, harvesting what you thought was a tax-saving $20,000 capital loss ($50,000 basis – $30,000 sales proceeds). You intended to use the $20,000 loss to shelter an equal amount of 2025 capital gains from your successful stock market sales. Having secured the tax-saving loss — or so you thought — you reacquired 2,000 ABC shares for $31,000 on April 29, 2025, because you still like the stock. Sadly, the wash sale rule disallows your expected $20,000 capital loss. The disallowed loss increases the tax basis of the substantially identical securities (the ABC shares you acquired on April 29, 2025) to $51,000 ($31,000 cost + $20,000 disallowed wash sale loss).

One way to defeat the rule

Avoiding the wash sale rule is only an issue if you want to sell securities to harvest a tax-saving capital loss but still want to own the securities. In most cases, investors do this because they expect the securities to appreciate in the future.

One way to defeat the wash sale rule is with the “double up” strategy. You buy the same number of shares in the stock or fund that you want to sell for a loss. Then you wait 31 days to sell the original batch of shares. That way, you’ve successfully made a tax-saving loss sale, but you still own the same number of shares as before and can still benefit from the anticipated appreciation.

Cryptocurrency losses are exempt (for now)

The IRS currently classifies cryptocurrencies as “property” rather than securities. That means the wash sale rule doesn’t apply if you sell a cryptocurrency holding for a loss and acquire the same cryptocurrency shortly before or after the loss sale. You just have a regular short-term or long-term capital loss, depending on your holding period.

Warning: Losses from selling crypto-related securities, such as Coinbase stock, can fall under the wash sale rule. That’s because the rule applies to losses from assets that are classified as securities for federal income tax purposes, such as stock and mutual fund shares.

Beware when harvesting losses

Harvesting capital losses is a viable tax-saving strategy as long as you avoid the wash sale rule. However, you currently don’t have to worry about the wash sale rule when harvesting cryptocurrency losses. Contact us if you have questions or want more information on taxes and investing.

Understanding the “step-up in basis” when inheriting assets

If you inherit assets after a loved one passes away, they often arrive with a valuable — but frequently misunderstood — tax benefit called the step-up in basis. Below is an overview of how the rule works and what planning might need to be done.

What “basis” means

First, let’s look at a couple definitions. Basis is generally what the owner paid for an asset, adjusted for improvements, depreciation, return of capital, etc. Capital gain (or loss) equals the sale price minus the basis.

At death, many capital assets (stocks, real estate, business interests, collectibles, crypto, etc.) are stepped up (or down) to their fair market value (FMV) as of the date of death (or, if elected by the executor, the “alternate valuation date” six months later). The heir’s new basis is that FMV, erasing the tax on any unrealized gain or loss that accumulated during the deceased person’s life.

For example, your father bought ABC stock many years ago for $50,000. At his death, it’s worth $220,000. Your inherited basis is $220,000. If you sell immediately for $220,000, there’s no capital gains tax. Hold it and sell later for $260,000 and you’ll only recognize the $40,000 gain since the date of death.

Some assets don’t receive a stepped-up basis. For example, 401(k)s and IRAs are excluded.

Actions for heirs and future estates

There are some steps that heirs and individuals planning their estates can take.

After a death, heirs should:

• Document the FMV of assets on the date of death. You can use brokerage statements, appraisals, Zillow printouts, cryptocurrency exchange screenshots, etc.
• Retitle assets into your name or trust as soon as possible to avoid administrative issues.
• Keep meticulous records. You may sell years later, or the IRS may question you.

Asset owners planning ahead should:

• Inventory low-basis assets you plan to hold and include in your estate.
• Harvest losses strategically to offset gains you can’t eliminate through a step-up.
• Coordinate gifting and lifetime transfers. Remember that gifts use a carry-over basis. This means if you are given a gift (rather than an inheritance), your basis is generally the same as the donor’s was when the gift was made.

Good records and proactive planning

These are the basic rules. Other rules and limits may apply. For example, in some cases, a deceased person’s executor may be able to make an alternate valuation election. And gifts made just before a person dies (sometimes called “death bed gifts”) may be included in the gross estate for tax purposes.

Reach out to us for tax assistance when estate planning or after receiving an inheritance. We’ll help you chart the most tax-efficient path forward.

An essential tax deadline is coming up — and it’s unrelated to your 2024 return filing

Tuesday, April 15 is the deadline for filing your 2024 tax return. But another tax deadline is coming up the same day, and it’s essential for certain taxpayers. It’s the deadline for making the first quarterly estimated tax payment for 2025 if you’re required to make one.

Basic details

You may have to make estimated tax payments for 2025 if you receive interest, dividends, alimony, self-employment income, capital gains, prizes or other income. If you don’t pay enough tax through withholding and estimated payments during the year, you may be liable for a tax penalty on top of the tax that’s ultimately due.

Estimated tax payments help ensure that you don’t wind up owing one large lump sum — and possibly underpayment penalties — at tax time.

When payments are due

Individuals must pay 25% of their “required annual payment” by April 15, June 15, September 15, and January 15 of the following year to avoid an underpayment penalty. If one of those dates falls on a weekend or holiday, the payment is due the next business day. For example, the second payment is due on June 16 this year because June 15 falls on a Sunday.

Individuals, including sole proprietors, partners and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their tax returns are filed. The required annual payment for most individuals is the lower of 90% of the tax shown on the current year’s return or 100% of the tax shown on the return for the previous year. However, if the adjusted gross income on your tax return for the previous year was more than $150,000 ($75,000 if you’re married filing separately), you must pay the lower of 90% of the tax shown on the current year’s return or 110% of the tax shown on the return for the previous year.

Generally, people who receive most of their income in the form of wages satisfy these payment requirements through the tax withheld from their paychecks by their employers. Those who make estimated tax payments usually do so in four installments. After determining the required annual payment, they divide that number by four and make equal payments by the due dates.

Estimated payments can be made online, from your mobile device on the IRS2Go app or by mail on Form 1040-ES.

Annualized method

Instead of making four equal payments, you may be able to use the annualized income method to make unequal payments. This method is useful to people whose income isn’t uniform over the year, for example, because they’re involved in a seasonal business.

Stay on top of tax obligations

These are the general rules. The requirements are different for those in the farming and fishing industries. Contact us if you have questions about estimated tax payments. In addition to federal estimated tax payments, many states have their own estimated tax requirements. We can help you stay on top of your tax obligations so you aren’t liable for penalties.

Discover if you qualify for “head of household” tax filing status

When we prepare your tax return, we’ll check one of the following filing statuses: single, married filing jointly, married filing separately, head of household or qualifying widow(er). Only some people are eligible to file a return as a head of household. But if you’re one of them, it’s more favorable than filing as a single taxpayer.

To illustrate, the 2025 standard deduction for a single taxpayer is $15,000. However, it’s $22,500 for a head of household taxpayer. To be eligible, you must maintain a household that, for more than half the year, is the principal home of a “qualifying child” or other relative of yours whom you can claim as a dependent.

Tax law fundamentals

Who’s a qualifying child? This is one who:

• Lives in your home for more than half the year,
• Is your child, stepchild, adopted child, foster child, sibling, stepsibling (or a descendant of any of these),
• Is under age 19 (or a student under 24), and
• Doesn’t provide over half of his or her own support for the year.

If the parents are divorced, the child will qualify if he or she meets these tests for the custodial parent — even if that parent released his or her right to a dependency exemption for the child to the noncustodial parent.

Can both parents claim head of household status if they live together but aren’t married? According to the IRS, the answer is no. Only one parent can claim head of household status for a qualifying child. A person can’t be a “qualifying child” if he or she is married and can file a joint tax return with a spouse. Special “tie-breaker” rules apply if the individual can be a qualifying child of more than one taxpayer.

The IRS considers you to “maintain a household” if you live in the home for the tax year and pay over half the cost of running it. In measuring the cost, include house-related expenses incurred for the mutual benefit of household members, including property taxes, mortgage interest, rent, utilities, insurance on the property, repairs and upkeep, and food consumed in the home. Don’t include medical care, clothing, education, life insurance or transportation.

Providing your parent a home

Under a special rule, you can qualify as head of household if you maintain a home for your parent even if you don’t live with him or her. To qualify under this rule, you must be able to claim the parent as your dependent.

You can’t be married

You must be single to claim head of household status. Suppose you’re unmarried because you’re widowed. In that case, you can use the married filing jointly rates as a “surviving spouse” for two years after the year of your spouse’s death if your dependent child, stepchild, adopted child or foster child lives with you and you maintain the household. The joint rates are more favorable than the head of household rates.

If you’re married, you must file jointly or separately — not as head of household. However, if you’ve lived apart from your spouse for the last six months of the year and your dependent child, stepchild, adopted child, or foster child lives with you and you “maintain the household,” you’re treated as unmarried. If this is the case, you can qualify as head of household.

Contact us. We can answer questions about your situation.

Turning stock downturns into tax advantages

Have you ever invested in a company only to see its stock value plummet? (This may become relevant in light of recent market volatility.) While such an investment might be something you’d rather forget, there’s a silver lining: you can claim a capital loss deduction on your tax return. Here are the rules when a stock you own is sold at a loss or is entirely worthless.

How capital losses work

As capital assets, stocks produce capital gains or losses when they’re sold. Your capital gains and losses for the year must be netted against one another in a specific order based on whether they’re short-term (held one year or less) or long-term (held for more than one year).

If, after netting, you have short-term or long-term losses (or both), you can use them to offset up to $3,000 of ordinary income ($1,500 for married taxpayers filing separately). Any loss in excess of this limit is carried forward to later years until all of it is either offset against capital gains or deducted against ordinary income in those years, subject to the $3,000 limit. If you have both net short-term and net long-term losses, the net short-term losses are used to offset ordinary income before the net long-term losses.

If you’ve realized capital gains from stock or other asset sales during the year, consider selling some of your losing positions to offset the gains. A good tax strategy is to sell enough losing stock to shelter your earlier gains and generate a $3,000 loss since this is the maximum loss that can be used to offset ordinary income each year.

Implications of the wash sale rule

If you believe that a stock you own will recover but want to sell now to lock in a tax loss, be aware of the wash sale rule. Under it, if you sell stock at a loss and buy substantially identical stock within the 30-day period before or after the sale date, you can’t claim the loss for tax purposes. In order to claim the loss, you must buy the new shares outside of the period that begins 30 days before and ends 30 days after the sale of the loss stock.

When stock is worth nothing

In some cases, a stock you own may have become completely worthless. If so, you can claim a loss equal to your basis in the stock, which is generally what you paid for it. The stock is treated as though it had been sold on the last day of the tax year. This date is important because it affects whether your capital loss is short-term or long-term.

Stock shares become worthless when they have no liquidation value. That’s because the corporation’s liabilities exceed its assets and have no potential value and the business has no reasonable hope of becoming profitable. A stock can be worthless even if the corporation hasn’t declared bankruptcy. Conversely, a stock may still have value even after a bankruptcy filing, if the corporation continues operating and the stock continues trading.

You may not discover that a stock has become worthless until after you’ve filed your tax return for the year of worthlessness. In that case, you can amend your return for that year to claim a credit or refund due to the loss. You can do this for seven years from the date your original return was due, or two years from the date you paid the tax, whichever is later.

Maximize the tax benefits

As you can see, deducting stock losses or worthless stock on your tax return can be complex. Therefore, it’s important to maintain thorough documentation. We can help maximize the benefits. Keep in mind that other rules may apply. Let us know if you have any questions.