A wash sale occurs when you buy the same security or a "substantially identical" security within 30 days before or after the date you sold an investment at a loss. When a wash sale occurs, the loss on the sale cannot be used to offset gains or reduce taxable income and is added back to your cost basis.
For example, if you buy 10 shares of ABC stock for $100 per share ($1,000 of stock). One year later, the stock price drops and you sell your 10 shares for $8 per share for a $200 loss. Within 30 days, you purchase ABC 10 shares at $6 for $600. This triggers a wash sale and the $200 loss is added back to the cost basis of your ABC shares, increasing it from $600 to $800.
Our direct indexing algorithm will attempt to avoid wash sales in your direct indexing portfolio automatically. However, the algorithm will not take into account any trades that you execute in your self managed portfolio or any trading outside of Frec when determining wash sales. Additionally, keep in mind that trades within your spouse's account could also cause wash sales.
You have the option to participate in “Auto convert” within your self-managed portfolio. “Auto convert” allows you to select securities you want Frec to automatically sell when the security’s cost basis is at a loss. The cash is then invested into your direct indexing portfolio. If you elect to participate in “Auto convert” we will not monitor for buys you make in your self-managed portfolio. Therefore, any buys of securities that you select in “Auto convert” may result in a wash sale.
Frec does not provide tax advice and you should consult your own tax advisor for your specific situation. This material was prepared for informational purposes.