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Tax Selling, also known as tax-loss harvesting is the practice whereby an investor sells shares of an asset on which he has a negative cost basis in order to net the resulting capital loss against capital gains in other assets. The effect of tax selling is to reduce the investor's overall capital gain tax liability by offsetting gains with losses. Investors must have held the asset for at least 30 days prior to engaging in tax selling.
One possible danger of tax selling is the potential to violate the wash sale rule. This IRS rule penalizes taxpayers who sell an asset for purposes of tax selling and repurchase it again (or a "substantially identical" asset) within 30 days by disallowing the tax loss. Tax selling is usually conducted around the end of the calendar year as the taxpayers overall tax situation for the year becomes more evident.
For more information on tax selling, as well as wash sale rule restrictions, please see IRS publication 550.
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