Beware of “Wash Sales” When Selling Securities

If you’re planning to sell stock or other securities at a loss to offset gains you realized earlier in the year, beware of the “wash sale” rule. It comes into play when an investor wants to realize a loss on a security for tax purposes while continuing to invest in the security. Under the wash rule, selling securities for a loss and buying back substantially identical securities within 30 days before or after the sale date means the loss can’t be claimed for tax purposes.

The rule

The wash sale rule is designed to prevent taxpayers from benefiting from a loss without actually parting with ownership. Note that the rule applies not only to buying back stock within 30 days after selling it but also to a 30-day period before the sale date to prevent “buying the stock back” before it’s even sold.

Although the loss can’t be claimed on a wash sale, the disallowed amount is added to the cost of the new stock to increase its tax basis. So, the disallowed amount can be claimed when the new stock is finally sold at some point in the future (other than in a wash sale).

An example

Assume you buy 500 shares of XYZ Inc. for $10,000 and sell them on November 1 for $3,000. On November 15, you buy 500 shares of XYZ again for $3,200. Because the shares were “bought back” within 30 days of the sale, the wash sale rule applies. Therefore, you can’t claim a $7,000 loss. Your basis in the new 500 shares is $10,200: the actual cost plus the $7,000 disallowed loss.

If only a portion of the stock sold is repurchased, only that portion of the loss is disallowed. In the example above, if 60% of the shares sold were bought back, you’d be able to claim 40% of the loss on the sale. The remaining loss would be disallowed and added to your cost basis of the repurchased shares.

No surprises

The wash sale rule can deliver a nasty surprise at tax time. Contact us with questions as you’re contemplating year-end tax planning strategies for your investment portfolio.

Internal Controls Reduce Check Kiting Risk

A check kiting scheme relies on “float” time, which is the period between when a check is deposited and when the bank collects the funds on the check. In recent years, the float time has narrowed, but there’s still opportunity to capitalize on that delay. So it’s important for businesses to put internal controls in place to protect against this fraud risk.

No small matter

Check kiting schemes typically involve two or more banks, though some schemes can involve multiple accounts at one bank if there’s a lag in how the institution processes checks. The perpetrator’s goal is to falsely inflate the balance of a checking account so that written checks that otherwise would bounce, clear.

Check kiting is a federal crime that can lead to up to 30 years in federal prison, plus hefty fines. Even if a bank doesn’t press charges, it may close the account and report the incident to ChexSystems (similar to a credit bureau), making it difficult to open a new business account.

Strategies for grounding the kite

Here are five strategies your organization can implement to keep people from using your company’s accounts for check kiting:

1. Educate employees about bank fraud. Describe the types of transactions that qualify as bank fraud and their red flags. That makes workers aware of suspicious activities and demonstrates management’s commitment to preventing fraud.

2. Rotate key accounting roles. Segregate accounting duties. Rotate tasks among staffers if possible to help uncover ongoing schemes and limit opportunities to steal.

3. Reconcile bank accounts daily. Make sure someone trustworthy, who isn’t involved in issuing payments, reconciles every company bank account.

4. Maintain control of paper checks. Store blank checks in a locked cabinet or safe and periodically inventory the blank check stock. Also limit who’s allowed to order new ones.

5. Go digital. The most effective way to prevent most check fraud is to stop using paper checks altogether. Consider replacing them with ACH payments or another form of electronic payments.

Tighten up

Check kiting is relatively easy to perpetrate, particularly if your company isn’t vigilant about its check stock and bank account activity. For help tightening your internal controls, contact us.