Your portfolio took a beating, but you were able to use that to your tax advantage by selling some losers. Now one of your former stocks has turned around and you want it back.

In this tax tip: • No loss now, but later   • What exactly is identical?   • IRA swap eliminated

Don't be in too big of a hurry to call your broker. If you repurchase the stock too soon, you'll violate the wash sale rule. This regulation prohibits a shareholder from selling a holding at a loss, using that loss for a tax break and then turning right around and buying the same or similar stock.

It's designed to "prevent the deduction of noneconomic losses," says Selva Ozelli, international tax editor for RIA Thomson, a New York-based provider of tax information and software to tax professionals. That's basically what you're trying to do, Ozelli says, if the whole purpose behind a transaction is to generate a tax loss but you believe in the investment itself.

Most investors encounter the regulation when they reacquire a stock soon after selling, but it works the other way, too.

Specifically, the law says you may not take a tax loss on a security sale if you have obtained the same or a substantially identical security 30 days before or 30 days after a sale. So don't try to get around the rule by buying more of a stock just before you dump the poorly performing shares you already own.

No loss now, but later
When a stock transaction violates wash sale guidelines, the Internal Revenue Service will not let you take the tax break immediately. However, all is not lost.

"The deduction of your loss is postponed to a later date," says Ozelli. That is, the disallowed loss is added to the cost of the new shares you bought. This gives you the tax basis for the holdings, which you'll use when you sell the reacquired securities. Watch "Fixing a mistake on your return"

For example, Jim bought 100 shares of Stock A for $1,000 and sold them for $750, producing a $250 loss. Fifteen days later he bought 100 new shares of Stock A for $800. Because Jim bought identical stock, he can't immediately take the loss. But he can add the disallowed $250 to the $800 price of his new shares, producing a basis of $1,050 for the new shares. When Jim sells his reacquired Stock A shares, the adjusted basis will, depending on the sales price, produce a bigger loss to claim or reduce any taxable gains.

What exactly is identical?
The wash-sale timing considerations are pretty straightforward. That's not necessarily the case for the rule's other key component: the nature of the sold and repurchased stock.

Investors who deal in individual stocks usually don't have problems. It's easy to tell what stocks the IRS might deem substantially similar. But what about mutual funds?

Let's look at Jim's portfolio again. This time he's closing out his Fidelity XYZ Telecom Fund account at a loss. He believes, however, that the sector is poised for growth so he uses his XYZ proceeds to immediately buy shares of Vanguard ZZZ Telecom Fund. Because both funds are invested in telecom holdings, has Jim violated the wash sale rule?

While technically it looks that way, some tax professionals say Jim is in the clear thanks to IRS vagueness when it comes to wash sales and mutual-fund trading.