Originally Posted by
Half Smoke
the play has nothing to do with predicting stock prices
I consider it an advantage play because the IRS has through their "wash" rule prevented you from selling a stock and claiming a capital loss and then buying the stock right back one minute later
but as indicated in my post they can't prevent you from essentially getting the same benefit - because in the one instance if you gamble and buy it back after 30 days that is a zero sum gamble - so you still gained by being able to claim the capital loss
in the other example, which is a better strategy, you can buy a substantially similar security immediately after the sale - such as selling an index fund that tracks the S&P and buying one or an ETF that tracks the DOW - at the same time without waiting 30 days
very likely that those 2 securities would mirror each other for 30 days and I don't believe the IRS can call them "substantially identical" - the author of the Schwab link agrees
there are many, many other examples of this
the "advantage" is being able to claim the capital loss and have a lesser tax obligation without sacrificing gains from your position despite the IRS trying to limit your ability to do this through the "wash" rule
as indicated in the earlier post if you elect to gamble and buy it back in 30 days you may miss out on a gain but you also may be able to buy it back for less
I’ll help you out ... have MBA from top 5 Finance program years ago; got the CFA designation, Series 7 & 63 because it was a job requirement working on Buy Side on Wall Street.
When I learned it, it was “selling against the box” and the fact you can buy the exact security (the second “tranche”) right before you sold the first “tranche” and took the loss so long as you can identify the securities, e.g. the IRS does not require FIFO.
Here’s the deal, it’s not an advantage play because there’s no equity you are gaming. You are taking a risk with the stock, e.g. your effective equity position is unchanged and using synthetics introduces tracking error aka gives you new risks that is not part of the underlying security position.
You made a premise (in the original post) that the stock will recover or go up over time ... YOU DO NOT KNOW THAT. That was the hidden assumption that you made to pull of this advantage play.
You need to think about the economics, nothing you wrote in the first post assures the economics of the stock position will improve with time.