A wash sale results when a taxpayer sells stock or securities at a loss and within 30 days before or after the sale, buys, in a fully taxable trade, substantially identical stock or securities. This rule also applies if yousell the stock and your spouse, or a corporation you control, buys the substantially identical stock. Under the wash sale rules, the term “stockor securities” includes contracts or options to acquire or sell stocks or securities.

One of the requirements of a wash sale is that the stock or securities purchased must be substantially identical to the stock or securities sold.

Generally, stock or securities of one corporation are not considered substantially identical to stock or securities of another corporation. Theymay, however, be considered substantially identical in a reorganization where the stock and securities of the predecessor and successor corporations are substantially identical. Generally, preferred stock of acorporation is not considered substantially identical to the common stock of the same corporation, unless the preferred stock is convertible.

Where the wash sale rules apply, adjustments are made to the holding period and the basis of the property acquired in the transaction that triggered the rule. Generally, the holding period of the security disposedof is tacked onto that of the replacement security. Where a security orshare of stock is bought, and such purchase triggers the wash sale rule, the basis of the property acquired (new property) is the acquisition price plus the loss disallowed on the substantially identical securities.

If the number of shares of substantially identical stock or securities you bought within the 30 day period is less than the number of shares of stock or securities you sold, you must determine the particular shares of stock or securities to which the wash sale rules apply. This is done by matchingthe shares of stock or other securities sold with an equal number of the identical shares or securities bought. The shares should be matched in thesame order in which they were acquired. The matched shares andsecurities are subject to the wash sale rules.

Please note, however, that you should consult your tax and/or legal advisor(s) before performing such a transaction.

(Alan S. Moore is a financial advisor at Legg Mason Wood Walker, Inc., asecurities brokerage and financial services firm and member of the New York Stock Exchange, Inc. and SIPC.)

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