If you sell stocks or bonds or funds at a loss, you’re entitled to valuable tax breaks. However, your capital loss won’t count if you immediately buy back the same thing. There are three ways to avoid such a "wash sale":
1. Wait. If you sit on the sidelines 31 days and then buy back what you’ve sold, you can use the tax loss. However, you might miss a huge move on the upside, especially in today’s volatile market.
2. Buy something similar. You can sell one bank stock and buy another bank stock right away, for example, without jeopardizing your tax loss. The same is true for, say, selling a growth stock fund and buying another growth stock fund. But there’s no way of knowing if the substitute will do as well as the original.
3. Double up. Say you own 100 shares of ABC mutual fund and you want to sell them for a capital loss. You can buy another 100 shares of ABC first. Thirty-one days later, you can sell the original lot of ABC shares and take a tax loss.
This strategy keeps you invested in the fund you presumably want to own yet gives you a capital loss, too. You have to buy the second lot by November 28 this year if you want to get a tax loss on the first lot in 2008.
