1

Consider these transactions all with the same stock:

Buy   100 shares for $1000 on Jan 20, 2016
Sell  100 shares for $ 200 on Feb 20, 2018
Buy   100 shares for $ 100 on Feb 21, 2018
Sell  100 shares for $ 200 on Feb 22, 2018

Does this incur any short-term realized 2018 capital gain for USA taxes?

I know that the total gain is -$700 (i.e., a loss of $700), but I could easily argue for or against claiming a $100 short-term gain alongside a -$800 long-term gain. The wording from IRS Pub 550 is open to interpretation:

More or less stock bought than sold: If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

What if I add the following?

Buy   100 shares for $ 200 on Feb 23, 2018

I wouldn't expect this added line to change my short-term gain, but I'm lost in interpretation (and it's even hard to decide if I should pay any taxes based just on the spirit of taxation). Do I need to call the IRS to ask or are my examples already clear?

2

As you step through it, this is your state:

Buy 100 shares for $1000 on Jan 20, 2016

At the end of the day of 1/20/16, you have a position with a basis of $1000.

Sell 100 shares for $ 200 on Feb 20, 2018

At the end of the day 2/20/18, you have a long term loss of $800 (=200-1000).

Buy 100 shares for $ 100 on Feb 21, 2018

At the end of the day of 2/21/2018 you have incurred a wash sale as this purchase is within 30 days of the last sale at a loss. The loss and holding period is added to the basis of the first 100 shares of the new position. You have a long term holding held since 1/20/16, with a basis of $900 (=100+800).

Sell 100 shares for $ 200 on Feb 22, 2018

At the end of the day 2/22/2018, you have a long term loss of $700 (=200-900).

Buy 100 shares for $ 200 on Feb 23, 2018

At the end of the day 2/23/2108, you have incurred a wash sale as this purchase is within 30 days of the last sale at a loss. The loss and holding period is added to the basis of the first 100 shares of the new position. You have a long term holding held since 1/20/16, with a basis of $900 (=200+700).

1

Wash sales apply to losses.

Your first buy/sale resulted in a loss of $800. If you buy again within 30 days of that loss, which you do, the loss is disallowed and the cost basis of your new buy is adjusted to reflect the loss. Thanks to the wash sale rules your 2/21 buy for $100 actually cost you $900 on paper. When you sell these 100 shares on 2/22 you're left with a loss of $700. If you buy any shares of this security within 30 days of the 2/22 sale, you will have to step up the cost basis on those shares to account for this loss.

The wash sales, particularly in obvious chronological order using the same share count, are very simple. There is nothing to interpret. Did you buy shares within 30 days of a transaction that resulted in a loss? That's all.

The IRS wants you to be out of a position for 30 days before you're allowed to take the tax deduction of a loss.

Matching comes in to play when you have a more complex array of transactions.

Buy  10 @ $20 Day 1
Buy  15 @ $22 Day 2
Buy  5  @ $21 Day 3
Sell 7  @ $18 Day 8
Buy  10 @ $16 Day 12
Buy  15 @ $15 Day 40
Sell 12 @ $19 Day 45
Buy  20 @ $17 Day 60
etc.

It can get very tricky when there are varying lot sizes and a lot of activity. That's where matching and FIFO/LIFO come in to play. When you're dealing with a long position and you buy 100 sell 100 buy 100 sell 100 buy 100, the only thing that matters when you buy is, have you sold any shares resulting in a loss in the last 30 days? That's the only question. There's no differing or more advantageous way to handle the transactions, nothing is left up to interpretation or opinion.

In your array of transactions, you never even have a gain as far as the IRS is concerned. You have a mildly reduced loss after the 2/22 sale. When you buy again on 2/23 you don't even have the loss, you have a $200 asset that cost you $900 on paper.

  • Ok, check my comment to 0xFEE1DEAD since he's saying the same thing. And notice my question is not about trying to "book the loss" as much as it is about trying to reduce a short-term gain; the "loss and gain on same day" section from IRS Pub 550 somewhat addresses this and caused me to do these transactions all on different days for my example. – bobuhito Mar 13 at 19:07
  • 1
    Wash sales are about losses, not gains. You have a loss of $800 from the 2/20 sale. The wash sale rules are strictly about whether or not you can book that loss on your taxes. Wash sale rules are not about gains. There is an $800 loss, and the best case scenario for you would be to take a $800 deduction on your taxes. But you bought back in on 2/21, your 2/21 buy needs to be adjusted to include the $800 loss because it's disallowed. Because of this adjustment to your cost basis you never have a short term gain given the transactions you outline. – quid Mar 13 at 19:19
  • For the record, "The best case scenario for you would be to take a $800 deduction on your taxes" is not true here. This $800 deduction would come with a $100 short-term gain the next day, so the wash sale rule creating a single $700 deduction helps me for my unique example. I do get the point about wash sales being originally about losses and am really trying to ask a question beyond the basics here. – bobuhito Mar 14 at 4:20
  • You have a through misunderstanding of wash sale rules. When you lose money in a transaction, you get to deduct that loss against your gains, or up to $3,000 per year against income. So your first buy/sale would mean you lost $800, which is bad. If you have a gain of $800 somewhere else, you get to deduct this loss against the gain, so you owe no taxes on your gain. The wash sale rules prevent you from being able to deduct the loss by forcing you to step up your basis on the subsequent buy. Deducting a loss is the only positive impact of a loss, and these rules don't let you take the loss. – quid Mar 14 at 4:49
  • 1
    You say the word gain in your question and in every comment you've left. Long term losses are first deducted against long term gains. Short term losses are first deducted against short term gains. Once the two are netted remaining losses can be deducted against remaining gains, if losses exceed gains the loss can be deducted against income up to $3,000 per year. I think you think there's some magic to the distinction between long and short term losses. – quid Mar 14 at 5:56
0

If you sell the shares on 2/20 and buy them back on 2/21, it will be considered a wash sale and the loss will be disallowed.

As a consequence, the loss is added to the cost basis of the shares bought on 2/21. Similarly, the holding period is adjusted to reflect the initial holding period, i.e. 1/20/16 instead of 2/21/18

You will end up with a long-term loss of 200 - [100 - (200 - 1000)] = -700.

  • So, no short-term gains. To be clear, you don't expect the IRS to come after me for my capitalizing quickly on the low Feb 21 price and you're not "matching" any shares per my IRS quote. I too would like to believe this, but going to wait and see if anyone argues against it. – bobuhito Mar 13 at 18:45
  • Not sure why you’re saying that you’re not matching shares. The shares bought on 2/21 are matched with the shares sold on 2/20. For the shares sold on 2/22, there is no other purchase within the wash sale period to match with. (Prior to the additional purchase you asked about at the end.) – prl Mar 14 at 18:02
  • @prl One could alternatively match 1/20 to 2/20 and match 2/21 to 2/22. But, I see logic in your matching choice too...I'm just frustrated that the IRS Pub 550 quote in my question leaves this unclear. – bobuhito Mar 14 at 18:27
  • @bobuhito, no one could not. Matching only comes in to play when one is buying and selling different sized lots. If you buy 100 shares, sell 30 shares at a loss, then rebuy 50 shares within 30 days, you'd have to match the loss experienced on the 30 shares you sold to 30 of the 50 that you bought within 30 days. – quid Mar 14 at 19:36
  • @bobuhito, no you only match against shares traded within the wash sale period. You don’t do wash sale matching against shares bought years ago. – prl Mar 14 at 19:49

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