What happens to quick stock trades and tax liabilities?

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Q. My son was trading stocks in his account and he didn’t know about the wash sale rule. He bought and sold the same stock three times in one month, for example. What should he expect?
— Tax-concerned parent

A. Taxes should be a concern.

If you’re actively trading stocks, it’s important to understand what your tax liability may be.

It’s something many new investors overlook, only to get a nasty surprise come tax time.

You mentioned the wash sale rule.

The wash sale rule means that if you sell a stock at a loss, and then you buy the same or a substantially identical stock within 30 calendar days of when you sold it, you can’t take loss for that first sale.

The wash sale rules eliminates the sale of a security and the subsequent repurchase of the same security within a 30-day period in order to take a loss on that sale, said Michael Karu, a certified public accountant with Levine, Jacobs & Co. in Livingston.

“If a person has profits, the wash sale rules don’t apply, regardless of the number of purchases and sales within the time frame,” he said. “If a trade results in a loss and the security is repurchased, under the wash sale rules, that loss is eliminated, but the basis reverts to the original purchase price.”

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This story was originally published on Dec. 9, 2022.

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