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Tax Basics
Tax Issues Related to Wash Sales, Lottery Winnings etc.
by InvestorGuide Staff (Write for us!)
(Click on the links within the article to get definition of that word)
The IRSdefines a washsale as
the selling of a security at a loss and the immediate repurchase of the identical security within 30 days of the initial sale in order to reduce your taxes. The wash sale rule was created to prevent a person from buying back the same security within a short period of time, to take advantage of rules that allow you to offset your capital gains with capital losses. If you repurchase the security before the end of the 30-day period, the IRS will automatically disallow the loss and adjust the basis of your new purchase to reflect the loss.
Lottery
Lottery winnings are taxable at the federal level and in some cases at the state level as well. If you win more than $5,000 in the lottery, you must pay federal income taxes. You will get a Form W-2G from the payer (which also goes to the IRS) showing the total amount won and the taxes withheld. These earnings might bump up your tax bracket, in which case the amount withheld might not be enough to cover your taxbill.
While
the term 'investment interest' might sound like it means the interest you earn on your investments, to the IRS it actually means something different. Investment interest is money that an investorpays on a loan that's used to purchase an investment. The investment can be stocks, bonds, real estate, or another type of asset. However, the definition does not include a primary or secondary home, rental income property, or property that's used for business. The most common type of investment interest is margin interest, which an investor pays to a broker when 'buying on margin' (that is, buying securities with money borrowed from the broker).
Holding period is the length of time that you have held an asset; it determines whether a gain/loss is a short-term or long-term capital gain. The trade date determines the holding period and the year in which the sale must be reported. A long-term holding period is one year and one day. The short-term holding period is less than one year.
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