But, if the preferred stock can be turned into common stock, has the same voting rights, or is limited in the same way in terms of dividends, then it would be considered substantially identical. However, in certain situations, like a reorganization, those stocks could be considered substantially identical.Īccording to the IRS, a corporation's bonds and preferred stock are usually not considered too similar to its common stock.Generally, stocks of one corporation are not considered substantially identical to those of another corporation.

If you're trying to figure out if the IRS might disallow some of your capital losses, IRS Publication 550 contains some wash sale rule examples that could help. So, what’s considered substantially identical for the wash sale rule will largely depend on the facts and circumstances of your transaction. The challenge with the second option is that the term “substantially identical” hasn’t been defined by Congress or the IRS. Alternatively, if waiting 61 days isn't feasible, you can purchase a security that is not substantially identical to the one you recently sold.

Keep in mind that the wash sale rule goes into effect 30 days before and after the sale, so you have a 61-day window to avoid buying the same stock.

One choice is to hold off on repurchasing the same or very similar stock that you sold.

If you want to avoid the IRS disallowing your loss due to the wash sale rule, you have a few options.

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