Selling stock by year-end? Watch out for the wash sale rule

Selling stock by year-end? Watch out for the wash sale rule

If you’re thinking about selling stock shares at a loss to offset gains that you’ve realized during 2022, it’s important to watch out for the “wash sale” rule.

The loss could be disallowed

Under this rule, if you sell stock or securities for a loss and buy substantially identical stock or securities back within the 30-day period before or after the sale date, the loss can’t be claimed for tax purposes. The rule is designed to prevent taxpayers from using the tax benefit of a loss without parting with ownership in any significant way. Note that the rule applies to a 30-day period before or after the sale date to prevent “buying the stock back” before it’s even sold. (If you participate in any dividend reinvestment plans, it’s possible the wash sale rule may be inadvertently triggered when dividends are reinvested under the plan, if you’ve separately sold some of the same stock at a loss within the 30-day period.)

The wash sale rule even applies if you repurchase the security in a tax-advantaged retirement account, such as a traditional or Roth IRA.

Although a loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock. So, the disallowed amount can be claimed when the new stock is finally disposed of in the future (other than in a wash sale).

Let’s look at an example

Say you bought 500 shares of ABC, Inc. for $10,000 and sold them on November 4 for $3,000. On November 29, you buy 500 shares of ABC again for $3,200. Since the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is bought back, only that portion of the loss is disallowed. So, in the above example, if you’d only bought back 300 of the 500 shares (60%), you’d be able to claim 40% of the loss on the sale ($2,800). The remaining $4,200 loss that’s disallowed under the wash sale rule would be added to your cost of the 300 shares.

If you’ve cashed in some big gains in 2022, you may be looking for unrealized losses in your portfolio so you can sell those investments before year-end. By doing so, you can offset your gains with your losses and reduce your 2022 tax liability. But be careful of the wash sale rule. We can answer any questions you may have.

Balancing your company’s sales strategies

Inbound vs. outbound: Balancing your company’s sales strategies

It might sound like the lingo of air traffic controllers — inbound vs. outbound. But businesses of all types must grapple with these concepts and their associated challenges when developing sales strategies.

Inbound sales originate when someone contacts your company to inquire about buying a product or service, whereas outbound sales arise from members of your sales team reaching out to customers and prospects.

Like many businesses, yours may not have the luxury of choosing one approach over the other. You probably have to find the right balance.

Inbound sales: Marketing your brand

Inbound sales are all about marketing your brand. Customers and prospects need to know who you are and what you offer, otherwise they won’t be in touch.

Thus, you’ll need to invest in a strong brand-based, content-driven marketing strategy that establishes and maintains your reputation as a “destination business” in your industry. Interested parties who encounter your marketing materials should wind up thinking, “I want to go there.”

If you can accomplish that, you’ll need a well-trained, patient inside sales team who are experts on your products or services. The word “patient” is key. One of the downsides to inbound sales is that they can take longer to close than outbound sales. They’re also less targeted. You have to deal with whoever contacts you. Some prospects might show up with unrealistic expectations or turn out to be difficult customers.

On the plus side, inbound sales are typically less labor-intensive and expensive because the buyer is coming to you and your customer base is generally more concentrated. What’s more, inside sales teams may incur less turnover because of lower rejection rates and a greater emphasis on technical know-how over a traditional “make your numbers or else” mindset.

Outbound sales: Lots of work, big potential

Outbound sales are largely based on intensive market research. You need to know the demographics and other key data points of those most likely to buy from you — and then you’ve got to go out and get ’em.

The downside to outbound sales is they tend to entail much more work (cold calls, follow-up, virtual and/or in-person meetings) and typically incur a higher rejection rate. In addition, this approach is often more expensive. You’ll need to cast a much wider net in terms of marketing and advertising. Outside salespeople tend to work longer hours, and they may incur substantial travel expenses and have a higher turnover rate. You might need more of them to cover your sales territories, too.

All that said, under the right circumstances and when properly executed, outbound sales can generate more revenue than inbound sales. You can target a large number of precisely the types of customers who will most likely buy from you, and sales are often quicker and easier to close.

Assess your position

Has your company been running on autopilot when it comes to balancing inbound vs. outbound sales? Now’s a good time to address the issue as we head into the new year.

If, for example, you’re waiting around for inbound sales that aren’t showing up, maybe it’s time to pivot to an outbound sales strategy. On the other hand, if you’ve emerged as a major player in your market, perhaps you can cut back on the outreach, beef up your brand and rely more on inbound sales. Contact us for help evaluating your sales numbers, as well as identifying the costs and forecasting the potential revenue of both approaches.

When inheriting money, be aware of “income in respect of a decedent” issues

Once a relatively obscure concept, “income in respect of a decedent” (IRD) may create a surprising tax bill for those who inherit certain types of property, such as IRAs or other retirement plans. Fortunately, there may be ways to minimize or even eliminate the IRD tax bite.

Basic rules

For the most part, property you inherit isn’t included in your income for tax purposes. Items that are IRD, however, do have to be included in your income, although you may also be entitled to an IRD deduction on account of them.

What’s IRD? It is income that the decedent (the person from whom you inherit the property) would have taken into income on his or her final income tax return except that death interceded. One common IRD item is the decedent’s last paycheck, received after death. It would have normally been included in the decedent’s income on the final income tax return. However, since the decedent’s tax year closed as of the date of death, it wasn’t included. As an item of IRD, it’s taxed as income to whomever does receive it (the estate or another individual). Not just the final paycheck, but any compensation-related benefits paid after death, such as accrued vacation pay or voluntary employer benefit payments, will be IRD to the recipient.

Other common IRD items include pension benefits and amounts in a decedent’s individual retirement accounts (IRAs) at death as well as a decedent’s share of partnership income up to the date of death. If you receive these IRD items, they’re included in your income.

The IRD deduction

Although IRD must be included in the income of the recipient, a deduction may come along with it. The deduction is allowed (as an itemized deduction) to lessen the “double tax” impact that’s caused by having the IRD items subject to the decedent’s estate tax as well as the recipient’s income tax.

To calculate the IRD deduction, the decedent’s executor may have to be contacted for information. The deduction is determined as follows:

  • First, you must take the “net value” of all IRD items included in the decedent’s estate. The net value is the total value of the IRD items in the estate, reduced by any deductions in respect of the decedent. These are items which are the converse of IRD: items the decedent would have deducted on the final income tax return, but for death’s intervening.
  • Next you determine how much of the federal estate tax was due to this net IRD by calculating what the estate tax bill would have been without it. Your deduction is then the percentage of the tax that your portion of the IRD items represents.

In the following example, the top estate tax rate of 40% is used. Example: At Tom’s death, $50,000 of IRD items were included in his gross estate, $10,000 of which were paid to Alex. There were also $3,000 of deductions in respect of a decedent, for a net value of $47,000. Had the estate been $47,000 less, the estate tax bill would have been $18,800 less. Alex will include in income the $10,000 of IRD received. If Alex itemizes deductions, Alex may also deduct $3,760, which is 20% (10,000/50,000) of $18,800.

We can help

If you inherit property that could be considered IRD, consult with us for assistance in managing the tax consequences.

© 2022

TCJA Tax Strategies 2: Capital Gains – accessing the 0% and 15% capital gain rates and tax planning for capital transactions.

Often clients inquire with our office with questions like “What is my capital gains rate?” or “How much will I be taxed on a sale of <insert asset here> in 2019?”

While it is important to understand the amount of tax to be paid on any given transaction, it is even more important to understand the new opportunities afforded to those with capital transactions under the Tax Cuts and Jobs Act. The TCJA significantly expanded the 0% and 15% capital gain rate brackets. By pushing the 20% capital gain rate into higher territory – taxpayers with higher income can access the more favorable rates on their capital sale transactions. By expanding the 15% capital gain rate bracket more gain can also be fit into those brackets allowing for more gains to be taxed at lower rates. Based on historical tax rates and brackets, it’s a pretty great deal.

Capital Gains in General

When considering capital gains, you must first separate your short and long-term gains. Long-term, for these purposes, means gains or losses from investments you held for more than a year. Gains and losses from investments held for one year or less are short-term. Once you isolate your long and short term gains, you must separate your long-term gains and losses into three rate groups:

  • the 28% group, consisting of:
    1. capital gains and losses from collectibles (including works of art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages) held for more than one year;
    2. long-term capital loss carryovers; and
    3. section 1202 gain (gain from the sale of certain small business stock held for more than five years that's eligible for a 50% exclusion from gross income).
  • the 25% group, consisting of “unrecaptured section 1250 gain”—that is, gain on the sale of depreciable real property that's attributable to the depreciation of that property (there are no losses in this group); and
  • the 20%/15%/0% group, consisting of long-term capital gains and losses that aren't in the 28% or 25% group—that is, most gains and losses from assets held for more than one year.

While the 28% and 25% rate groups are relevant for many taxpayers, the majority of capital transactions still fall into category #3. As such, this article will focus on planning opportunities for most standard capital transactions.

Once you arrive at a net gain or loss from the three long-term categories above, you must net and apply short term and long term losses to the above:

  • Short-term capital losses (including short-term capital loss carryovers) are applied first to reduce short-term capital gains, if any, otherwise taxable at ordinary rates. If you have a net short-term capital loss, it reduces any net long-term gain from the 28% group, then gain from the 25% group, and finally reduces net gain from the 20%/15%/0% group.
  • Long-term capital gains and losses are handled as follows. A net loss from the 28% group (including long-term capital loss carryovers) is used first to reduce gain from the 25% group, then to reduce net gain from the 20%/15%/0% group. A net loss from the 20%/15%/0% group is used first to reduce gain from the 28% group, then to reduce gain from the 25% group.

If, after the above netting, you have any long-term capital gain, the gain that's attributable to a particular rate group is taxed at that group's marginal tax rate—28% for the 28% group, 25% for the 25% group, and the following rates for the 20%/15%/0% group:


For 2019, the 0% capital gains tax rate applies to adjusted net capital gain of up to:

  • $78,750 for joint filers and surviving spouses;
  • $52,750 for heads of household;
  • $39,375 for single filers; and,
  • $39,375 for married taxpayers filing separately.


For 2019, the 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to:

  • $488,850 for joint filers and surviving spouses;
  • $244,425 for married taxpayers filing separately;
  • $461,700 for heads of household; and,
  • $434,550 for single filers.; i.e., for 2018, the 15% tax rate applies to adjusted net capital gain over the amount subject to the 0% rate, and up to: $479,000 for joint filers and surviving spouses; $239,500 for married taxpayers filing separately; $452,400 for heads of household; and, $425,800 for single filers);


Gain that otherwise would be taxed in excess of the amount taxed under the 0% and 15%

A 3.8% tax on net investment income applies to taxpayers with modified adjusted gross income (MAGI) that exceeds $250,000 for joint returns and surviving spouses, $200,000 for single taxpayers and heads of household, or $125,000 for married taxpayers filing separately. After the 3.8% tax is factored in, the top rate on capital gain is 23.8%.

If, after the above netting, you're left with short-term losses or long-term losses (or both), you can use the losses to offset ordinary income, subject to a limit. The maximum annual deduction against ordinary income for the year is $3,000 ($1,500 for married taxpayers filing separately). Any loss not absorbed by the deduction in the current year 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 losses and net long-term losses, the net short-term losses are used to offset ordinary income before the net long-term losses are used.

Planning for the 0% and 15% capital gain rate

The first thing to remember is that the 0% and 15% rate brackets apply to LONG-TERM gains only (see above for definition of long-term gains). So make sure when you’re analyzing a transaction that you know the holding period of the asset in question. The holding period starts (usually) when you acquire the asset – the simplest way to think about it is a stock purchase; the holding period begins when you buy the stock. Long-term gains (and reduced rates) are for assets with a holding period of one year or more.

The second important thing to understand is the interaction of your ordinary income and capital income – meaning, how do we actually “access” the preferential rates?

Let’s do an example. Say you know that you’re a Married Filing Joint filer. Say that you also know that you have ordinary income from wages of about $250,000 between you and your spouse. Say you take the standard deduction and have no other adjustments or deductions. Lastly, say you’re planning to sell some company stock that you were awarded a few years ago that has appreciated significantly. How do you know when to sell it and how to you access those beneficial lower tax rates??

For purposes of this example, we’ll say that you have about 10,000 shares of company stock in Startup Co (your employer). You were awarded this stock about 3 years ago when the stock price was $1. The company has done well and the stock is currently trading at $31 per share.

Your basis (investment) in the stock is $10,000 (10,000 shares times the $1 FMV at time of award).

In a potential sale, you have proceeds of $310,000 - if you sell all of the stock.

The potential gain is $310,000 (proceeds) minus $10,000 (basis) = $300,000 of long-term capital gain.

Here’s a rough summary of how you would do the calculation (for simplicity we used the 2018 brackets):

Taxable Income (before gains): Wages $250,000 less standard deduction of $24,000 equals $226,000

Dividends: $0

Capital Gains: $300,000

Taxable income exceeds the 0% rate bracket for joint filers ($77,200 for 2018) before considering capital gains so none of the gains are taxed at 0%.

Since the 15% capital gain rate bracket is available until $479,000 then $253,000 of capital gain income can be taxed at 15%. How does that work? Simply subtract your other taxable income (per above) of $226,000 from the full rate bracket of $479,000. The difference is how much “room” is left in the 15% capital gain rate bracket.

So $253,000 of gains can be taxed at 15%.

The remaining gain of $47,000 ($300K total gain less $253K gain taxed at 15%) is taxed at 20%.

How can we do better?

One of the simplest planning methods is to split the gain into two years. How does this work?

If you sell half the stock in Year 1 – you will have only $150K of gain. This gain will not make it all the way to the 20% rate bracket and the entire gain will be taxed at 15%.

If you sell the other half of the stock in Year 2 – you will get to have another run at the 15% rate bracket. With only $150K of gains (assuming all other income is about the same), you’ll stay within the 15% rate bracket in year two.

The difference?

With planning: You pay $45,000 in capital gains taxes (not considering the NIIT) on your sale.

Without planning: You pay $47,350 in capital gains taxes (not considering the NIIT) on your sale.

Savings: $2,350

This example is minor and involves a modest amount of gain. However, the bigger the gain, the bigger the stakes. Splitting gain over multiple years is a tried and true method. Other planning options include netting and harvesting losses and structuring sales to coincide with other income and loss events. More advanced strategies like the 1031 exchange or qualified opportunity zone funds can also be considered. If you’re selling your primary residence, don’t forget about the primary residence gain exclusion.

Dividends taxed at long-term capital gains rates

Dividends that you receive from domestic corporations and “qualified foreign corporations” are taxed at the same rates that apply to the 20%/15%/0% group mentioned above. However, these dividends aren't actually part of that group, and aren't subject to the grouping and netting rules discussed above. The 3.8% tax on net investment income applies to dividends. With dividends, proper planning can also help keeping those taxed at the 0% or 15% rate. Some planning actions may be to consider the timing of capital transactions and dividend transactions.

Some other planning suggestions. Since losses can only be used against gains (or up to $3,000 additionally), in many cases, matching up gains and losses can save you taxes. For example, suppose you've already realized $20,000 in capital gains this year and are holding investments on which you've lost $20,000. If you sell the loss items before the end of the year, they will “absorb” the gains completely. If you wait to sell the loss items next year, you'll be fully taxed on this year's gains and will only be able to deduct $3,000 of your losses (if you have no other gains next year against which to net the losses).

Another technique is to seek to “isolate” short-term gains against long-term losses. For example, say you have $10,000 in short-term gains in Year 1 and $10,000 in long-term losses as well. You're in the highest tax bracket in all relevant years (assume that's a 37% bracket for Year 1). Your other investments have been held more than one year and have gone up $10,000 in value, but you haven't sold them. If you sell them in Year 1, they will be netted against the long-term losses and leave you short-term gains to be taxed at 37%. Alternatively, if you can hold off and sell them in Year 2 (assuming no other Year 2 transactions), the losses will “absorb” the short-term gains in Year 1. In Year 2, the long-term gains will then be taxed at only 20% (unless the gains belong in the 25% or 28% group).

Alternative minimum tax. The favorable rates that apply to long-term capital gain (and qualified dividend income) for regular tax purposes also apply for alternative minimum tax (AMT) purposes. In spite of this, any long-term capital gains you recognize in a year might trigger an AMT liability. This can happen if the capital gains increase your total income enough so that your AMT exemption phases out. The extra income from capital gains may also affect your entitlement to various exemptions, deductions, and credits, and the amounts of those AMT preferences and adjustments, that depend on the amount of your income.

Want to learn more about planning for capital transactions and accessing the preferential rates? Please contact us by submitting the form on our site or give us a call at 617 651 0531.