I have a question about wash sales.
Here's the scenario: let's say I'm trading XYZ with the following transactions:
- December 10, 2019, Buy 100 shares of XYZ [Lot 1] @ $100 each
- December 17, 2019, Buy 100 shares of XYZ [Lot 2] @ $105 each
- December 18, 2019, Sell Lot 2 @ 106 each
- January 6 2020, Sell Lot 1 @ $90 each
So let's analyze this situation.
First, let's pretend the last (January) transaction did not happen. There are no sales at a loss, so there is no wash sale. Then the only sale in 2019, the sale of Lot 2, has capital gains of $100, which are part of the 2019 fiscal year.
But now let's add in the sale of Lot 1 in January. This is a sale at a loss (a $1000 capital loss), so the wash sale rule applies. Within the 61 day wash sale window around January 6, there is one purchase of "substantially identical" stock: the purchase of Lot 2 in early December. Therefore the loss is moved into the cost basis of Lot 2. As a result, the cost basis of Lot 2 becomes $115 instead of $105. But then the sale of Lot 2 later in December is now a loss of $900 instead of a gain of $100.
So in summary, adding the January sale triggered the wash sale rule and moved losses backwards into the previous fiscal year. This seems entirely contrary to the intent of the wash sale rule. Is my interpretation of what would happen correct? If not, what communication by the IRS indicates that something would happen differently than I have indicated?
I've noticed that a lot of places on the internet, including other questions on this site, treat complicated wash sale scenarios as mostly academic and not worth the time/effort to answer. In particular, the advice given is often to avoid wash sales (thereby avoiding the complicated scenario) instead of actually answering the question. So to be completely clear, I don't currently have this situation in my finances but something like the above (just more complicated) may actually happen to me within the next couple of years. "Just don't do those transactions (in order to avoid wash sales)" is not a solution for me because I have unavoidable automatic transactions in the form of RSU vests and auto-sales.