Mistake #1: Wash Sale Violations
The wash sale rule is the most commonly violated tax rule among active investors. If you use tax-loss harvesting, you need to understand this rule. It trips up even experienced traders.
The Mistake
Selling an investment at a loss and buying it back (or a "substantially identical" security) within 30 days before or after the sale. This disallows the loss deduction.
Common Scenarios
- ✗Selling stock at a loss and buying it back the next week
- ✗Automatic reinvestment buying shares within 30 days of your loss sale
- ✗Buying in your 401(k) while selling in your taxable account
- ✗Spouse buying the same stock within 30 days
How to Avoid It
- • Wait at least 31 days before repurchasing the same security
- • Turn off DRIP when planning to tax-loss harvest
- • If staying invested, buy a similar (not identical) investment
- • Track purchases across all your accounts, including spouse's
Mistake #2: Cost Basis Errors
Your cost basis determines your taxable gain or loss. Getting it wrong means paying the wrong amount in taxes.
Forgetting to Include Fees
Trading commissions (if you paid them) should be added to your cost basis. This reduces your taxable gain. Most brokers now are commission-free, but if you paid fees, include them.
Ignoring Reinvested Dividends
If you use DRIP, each reinvested dividend creates a new tax lot with its own cost basis. When selling, your total cost basis should include all reinvested dividend purchases. Missing these means overstating your gain.
Transferred Shares Without Records
When transferring shares between brokers, cost basis should transfer too. But sometimes it doesn't, showing $0 basis. If you don't correct this, your entire sale proceeds could be taxed as gain.
Verify cost basis after broker transfers:
Most brokers track cost basis automatically, but always verify it after transferring shares between brokerages. Transferred cost basis can be incorrect or missing, which could lead to overpaying taxes when you eventually sell.
Mistake #3: Selling Just Before the One-Year Mark
The difference between 11 months and 13 months can mean paying double the tax rate. Gains on assets held less than a year are taxed as short-term capital gains, while those held longer qualify for lower long-term capital gains rates.
Example: $20,000 gain in the 24% tax bracket
- • Sell at 11 months (short-term): $4,800 in taxes
- • Sell at 13 months (long-term): $3,000 in taxes
- • Savings for waiting 2 months: $1,800
Before selling at a gain, always check your purchase date. If you're close to the one-year mark and don't urgently need to sell, waiting a few weeks can save significant money.
Exception: Don't let tax considerations override sound investment decisions. If a stock is collapsing and you want out, selling before the one-year mark is often better than holding a declining investment just for tax reasons.
Mistake #4: Missing Important Deadlines
| Deadline | What Happens If Missed |
|---|---|
| Dec 31: Tax-loss harvesting | Losses count for next year instead of this year |
| April 15: IRA contribution | Lose year of tax-advantaged growth |
| April 15: Estimated tax payments | Underpayment penalties and interest |
| Dec 31: 401(k) contribution | Can't contribute for prior year |
Mistake #5: Poor Account Placement
Holding the wrong investments in the wrong accounts can cost you in taxes:
REITs in taxable accounts
REIT dividends are taxed as ordinary income. Hold in tax-advantaged accounts.
Municipal bonds in IRAs
Muni bonds are already tax-free - putting them in an IRA wastes the benefit.
Not maxing out free employer match
Leaving matching money on the table is leaving free returns behind.
Note: Tax rules are complex and change frequently. This lesson provides general education to help you avoid common mistakes. Always consult a qualified tax professional for advice specific to your situation.
Congratulations! You've completed all the core lessons on investment taxes. Head to the course summary to review everything you've learned.