Final answer:
To avoid the wash sale disallowance of loss, investors can donate the securities to a charity or sell the securities at a gain and repurchase them immediately. Both strategies prevent a wash sale event by not violating the 30-day repurchase rule.
Step-by-step explanation:
The wash sale rule is a tax regulation that prohibits investors from claiming a tax deduction for a security sold in a wash sale. According to the IRS, a wash sale occurs when an investor sells a security at a loss and repurchases it, or a substantially identical security, within 30 days before or after the sale. To avoid the wash sale disallowance, investors can use certain tax planning techniques.
Two effective strategies to avoid the wash sale rule are:
- Donating the securities to a charity.
- Selling the securities at a gain and repurchasing them immediately.
By donating the securities to a charity, you can avoid the wash sale rule because no repurchase is involved, and it may additionally provide you with a charitable deduction. On the other hand, selling the securities at a gain does not trigger the wash sale rule since the rule only applies to losses; hence, repurchasing the stocks immediately afterward is allowed without any disallowance.