Ask the Dollar Diva By Dorothy Rosen • Bankrate.com

How do I claim my "wash sale" loss?

Dear Dollar Diva,
I bought and sold shares of Company A this year, as follows:

How do I figure out my loss? I know this is a "wash sale" since all transactions took place within 30 days, but I also know there is a way of claiming my loss at the end of the last transaction.

-- Juan

Assuming the shares you sold in July were the same shares you bought in June and there were no other transactions involving Company A, you don't have a "wash sale."

If, however, the shares of Company A stock you sold were not the same shares you purchased in June, but shares you owned prior to June, then you have a "wash sale."

Wash Sale

The "wash sale" rule is as follows:

If you buy "substantially identical stock" within 30 days before or after the sale of stock that you previously owned, the IRS will not let you take the loss deduction.

The rule is designed to prevent investors from making trades for the sole purpose of tax avoidance. Here's an example:

• Taxpayer sells shares of stock in XYZ. The stock has appreciated and the sale is going to give him a hefty capital gain.

• Taxpayer would like a hefty capital loss to offset the gain, but he loves the remaining stocks in his portfolio, and besides, they've all appreciated.

• Out of the blue, the best stock in his portfolio, FAV, takes a huge price dip. Hooray!

• Taxpayer sells 500 shares of FAV for the hefty capital loss to offset his hefty capital gain. Yipee.

• Taxpayer is still enamored with FAV, so he uses the proceeds from the sale of the old 500 shares of FAV to buy a new 500 shares of it.

Now that's cute. He gets his hefty capital loss, and he still has 500 shares of FAV sitting in his portfolio. The IRS says this flim-flam is a "wash" and the loss is not allowed.

For more information on "wash sales" see IRS Publication 550, Investment Income and Expenses

Even though you can't take the loss from a "wash sale," report it on Schedule D, Capital Gains and Losses when you file your tax return; the form's instructions tell you how to make the entry. The IRS will receive a 1099B reporting the sale, and will look for the transaction on your tax return. Read about the 1099B in How do I figure out capital gains tax?

The "wash sale" rule only applies to losses. If you have a gain, you get to pay tax on it.

Capital gains -- not a "wash sale"

If it's not a "wash sale," and the stock you sold in July is the same stock you bought in June, you can take the loss. The entry on your Schedule D to compute the loss will look like this:

The Diva smells a novice investor buying a stock without doing his research and running scared when it loses a couple of points. It's the mortal sin committed when you buy on a tip or try to time the market -- you buy high and sell low.

You lost more than $1,300, but if you learned this lesson, you're way ahead of the game; buying a stock without doing your homework is gambling, not investing, and should only be done with money you can afford to flush down the toilet.

The Diva suggests you start your education in stock picking with Peter Lynch's classic One Up on Wall Street, and when you're ready to invest, go to her "Rate company performance" for help with your research. The more advanced investor will learn the ins and outs of the high tech game by curling up with Geoffrey A. Moore's, The Gorilla Game: Picking Winners in High Technology.

DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting, from the Kellogg Graduate School at Northwestern University in Evanston, Ill. Rosen has more than 15 years of experience in the financial arena, serving in Illinois and Florida as a certified public accountant, financial consultant, expert witness and educator. She is owner of Dorothy Rosen, CPA, a public accounting firm that serves individuals and small businesses.