What is a Tax Swap?
How Does a Tax Swap Work?
Let's assume that John owns 1,000 shares of Mutual Fund XYZ. He purchased the shares for $25 a share, but now they're worth only $15. On paper, he's lost $10,000.
John wants to deduct this loss on his tax return, but he can only do so if he actually sells the shares. John believes that the sector in which Mutual Fund XYZ invests is a good long-term investment, so he does a tax swap: He sells his 1,000 shares of Mutual Fund XYZ and uses the money to purchase shares of Mutual Fund ABC, which invests in the same sector and uses many of the same trading methods. This enables John to deduct the capital loss on his tax return while staying invested in virtually (but not exactly) the same investment.
Why Does a Tax Swap Matter?
Although investment losses are generally tax deductible, selling securities at a loss in order to get a tax benefit and then buying the stock back right away is prohibited by the IRS. The IRS prohibits taxpayers from deducting losses on the sale of an investment if the taxpayer purchases the same security 30 days before or after the sale (called a "wash sale"). Wash sales are prohibited, tax swaps are not.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Volatility is defined as how quickly prices move. Traders can use technical analysis to...Read More →
Sean Quinn was once the richest man in Ireland. In 2008, Forbes estimated Quinn's riches reached $6 billion. Today, however, he owes Anglo Irish Bank $2.7 billion and in November, he claimed to...Read More →
Every year in January, I do a big portfolio review. I rebalance my portfolio and make sure that I still like my current mutual funds and ETFs. And I get to know the...Read More →