Tax-loss harvesting means deliberately selling a position at a loss to realize a tax benefit, typically while replacing it with something similar enough to keep the portfolio's exposure intact. It is one of the few purely mechanical sources of after-tax return available to a taxable investor, and one of the easiest disciplines to execute incorrectly. In the United States, the rule that governs the trap is the wash-sale rule: if you sell a security at a loss and then, within 30 days before or after the sale, buy the same or a "substantially identical" security (or acquire a contract or option to do so), the loss is disallowed for current tax purposes (the SEC's Investor.gov and IRS Publication 550 state this window and mechanism). The disallowed loss is not lost forever, it is added to the cost basis of the replacement shares, and the original holding period tacks onto the new position, so the mistake defers the tax benefit rather than destroying it outright, provided you eventually sell the replacement position without repeating the mistake. One genuinely sharp trap deserves a specific warning. The wash-sale rule's reach extends to a repurchase inside an IRA, including, by long-standing IRS guidance in Revenue Ruling 2008-5, an IRA belonging to the same investor, and market practice treats a spouse's account as similarly exposed. Losses realized inside a tax-advantaged account cannot be added to basis the normal way, so a wash sale triggered through an IRA repurchase can turn a temporary deferral into a permanent loss of the tax benefit. Treat any repurchase in a related account, by either spouse, in any wrapper, as suspect until checked.
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Tax-loss harvesting in India: is there a wash-sale rule?
India has no general wash-sale rule. A bare same-day sale-and-repurchase of a listed stock or fund at a loss, with no dividend or bonus event nearby, is not blocked by anything comparable to the US mechanism. That surprises US-trained advisers moving into Indian practice, and it surprises Indian investors who absorbed the US rule from financial media and assumed it applies at home. What India does police, narrowly and specifically, is dividend stripping and bonus stripping, under Sections 94(7) and 94(8) of the Income Tax Act. Under Section 94(7), an investor who buys a security or a mutual fund unit within three months before a dividend record date and sells within three months after it, or nine months after for a fund unit, has the loss disallowed to the extent of the dividend or income received. Not the whole loss automatically: only the portion up to the dividend amount, with any excess still usable. Section 94(8) applies the analogous logic to bonus shares. The two regimes are different animals rather than the same rule with different numbers. The US wash-sale rule is a blanket prohibition triggered purely by repurchase timing, with no dividend or corporate-action requirement at all. India's rule targets a specific abuse pattern, harvesting a loss manufactured by a dividend or bonus event, and leaves an ordinary loss-and-immediate-rebuy untouched when no such event is nearby. Worked Example 2 and the practice set compute both mechanisms precisely, including the case where the loss is smaller than the dividend and the entire loss (not a partial amount) is disallowed under Section 94(7).
{
"skill": "Keeping a tax-rule summary current before it reaches a client-facing document",
"use": "Have an AI tool draft a plain-language summary of 'the current capital-gains / wash-sale / dividend-stripping rules' for a jurisdiction, purely as a starting point to be checked - not as the final word, since these rules are amended on a predictable annual cycle (the Finance Act in India; IRS Revenue Procedures and any new legislation in the US) that most models' training data will lag.",
"tools": ["Chat assistants - Claude, ChatGPT, Gemini", "A retrieval/browsing-enabled research tool that can pull the actual current-year circular or Revenue Procedure"],
"prompt": "Summarize the current <RULE> as of today's date for <JURISDICTION>. State explicitly which primary source (the exact Finance Act section, IRS Publication or Revenue Procedure number, or PFRDA/RBI circular) this is based on, and flag anything you are not fully certain has been updated for the current tax year.",
"verify": "Tax law is amended on a known annual cycle, which makes this the single highest date-check-risk fact type in the corpus (Guardrail #4). Trace every rate and threshold to the actual current-year primary source - incometaxindia.gov.in for India, irs.gov for the US - never to the model's summary of it, and re-confirm every figure in this module's own citations against the current Finance Act / Revenue Procedure before reusing them past this year.",
"diy": "You must already know the mechanism well enough to recognize a plausible-sounding but wrong rule when you see one - which US-vs-India contrast in this section, worked by hand, is built to install. AI keeps your summary fresh; it cannot substitute for knowing which primary source actually governs the answer.",
"market": "US"
}