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Let's say a Day Trader buys and sells a stock on the same day and makes a loss of $1,000. Then she buys and sells the same stock the next day and makes a profit of $500. On the third day she files her taxes.

As I understand the Wash Sales rule, she cannot claim a $500 overall loss on the stock. She will need to declare a $500 profit on the stock. Because she bought a "substantially similar" (identical, actually) stock within 30 days of the loss transaction.

Am I interpreting this correctly? (I hope I'm wrong!)

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In the future, please specify a country tag when you ask a question relating to taxes or regulation. Thank you. –  Chris W. Rea Aug 28 at 1:54
    
The wash-sale rule is one of the reasons that some day-traders tend to prefer trading equity futures (which have no wash-sale governance), as opposed to individual stocks. –  Mike Pennington Aug 28 at 9:15

1 Answer 1

up vote 15 down vote accepted

You are correct. She cannot claim the initial loss of $1,000 on her taxes, she can only report the $500 profit.

However, the IRS does allow her to add the $1,000 loss to the basis cost of her replacement shares.

e.g.

  1. Trader buys 100 shares at $100 / share.
  2. Trader sells 100 shares later that day at $90/share. Loss of $1,000
  3. Trader buys 100 shares the next day at $85/share.
  4. Trader sells 100 shares later that day at $90/share. Gain of $500
  5. Trader can add the initial $1,000 loss from #2 to the $8,500 spent in #3, for a total cost of $9,500 and a sale (#4) of $9,000, resulting in a net loss of $500.
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Faster than I am. :) Here's a nice link with another example: investopedia.com/terms/w/washsalerule.asp –  Alex B Aug 27 at 20:45
    
irs.gov/publications/p550/ch04.html#en_US_2013_publink100010601 - Example 1 details this –  Noah Aug 27 at 20:46
    
@Noah Thanks. What's the reason why the IRS would want it this way, but not the other way? (It sounds to me like, regardless, she ends up claiming a $500 loss.) –  user1883050 Aug 27 at 23:23
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I feel like I will never understand the reasoning behind many of the IRS's rules –  Noah Aug 27 at 23:27
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@user1883050 The reason for this is to prevent someone from selling a stock for a loss near the end of the year and immediately buying it back. The wash sale rule would prevent them from claiming the loss in the tax year in which they sold it. –  pacoverflow Sep 7 at 4:16

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