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New to trading, trying to understand how wash sales apply to short term trades that occur in the middle of the tax year. Consider the following scenario:

Day 1: Buy 100 ABC for $10

Day 2: Sell 100 ABC for $5

Day 3: Buy 100 ABC for $4

Day 4: Sell 100 ABC for $10

At the end of the tax year, will my broker make the cost basis adjustment to the buy on Day 3 for me? Or will they simply tell me the $ amount of my wash sales, at which point I need to manually find and adjust every instance of this on my own?

marked as duplicate by Nathan L united-states Apr 2 at 20:55

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    Why? Why are you worried about this? – quid Mar 27 at 17:21
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    Because if I were to do this constantly throughout the year and the broker does not make the adjustment, it would be a huge headache come April, wouldn't it? – jimmyd Mar 27 at 17:23
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    You stated this occurs "in the middle of the tax year". Only if day 2 is last year and day 4 is this year could your scenario be a wash sale. Otherwise (and assuming day 3 and day 4 are the same number of shares) this example does not appear to be a wash sale. Your position is closed and you can assess your net gain for the tax year. – user662852 Mar 27 at 17:30
  • @user662852 The wash sale rule doesn't care what tax years buys or sells take place in. Here's the actual text of the law. Nowhere does it take into account which tax year a sale or purchase occurs in. – David Schwartz Mar 27 at 17:41
  • Yes, I understand that from a tax standpoint, I have a net gain. However, let's assume the above is my only activity all year, for simplicity's sake. When my broker sends me a 1099-B at the end of the year, will it show a $100 realized gain or will it show $600, at which point I have to somehow manually make the adjustment? – jimmyd Mar 27 at 17:43
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If all of your transactions are in the same tax year there is zero difference in outcome.

Basic accounting with no wash sale yields a net $1 gain:

Transaction 1       Transaction 2

Buy $10             Buy $4

Sell $5             Sell $10

Result -$5          Result +$6

Net +$1

Now consider wash sale, with a disallowed and appropriate cost basis adjustment you get the same $1 gain.

Buy $10 -> Sell $5 = -$5

Buy $4 within 30 days, adjust cost basis to $9

Sell $10

Net +$1

The ONLY way this would matter to you is if Day 2 is December 31, 2018 and Day 3 is January 1, 2019 because that would mean you could not take the $5 loss in your 2018 taxes.

Your broker probably handles these adjustments as they come up, I believe they have to as part of their requirement to issue appropriate 1099s. Wash sales largely don't matter, particularly if you're opening and closing positions as in your example.

One caveat. These accounting rules apply to all of your holdings, and the holdings of your spouse where applicable, regardless of where they are stored. So, IF you have your assets in multiple accounts, you would have to track this on your own.

  • It matters because when you fill out a form 8949, the IRS requires you to identify wash sales and the appropriate adjustment. Even if it makes no difference to the amount of taxes you ultimately pay, it does affect the way you fill out the form. – David Schwartz Mar 27 at 17:45
  • So in this scenario, if this was my only activity, my broker is gonna send me a 1099 that says $100 realized gain? – jimmyd Mar 27 at 17:45
  • @jimmyd Yes, but not only that it will have the appropriate adjustments to each transactions if any of them qualify as wash sales so you won't have to go to the trouble of trying to work it out yourself. (Unless you have multiple accounts or use multiple brokers. And they may not catch securities that are substantially identical but not identical.) – David Schwartz Mar 27 at 17:46
  • Yes @DavidSchwartz I agree, it doesn't matter. – quid Mar 27 at 17:46
  • Thanks gentlemen you rock – jimmyd Mar 27 at 17:47
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Fortunately, your broker will make any necessary adjustments for you so long as all trades take place within the same account and using the same broker. This is very fortunate because it seems that almost nobody understands precisely when and how the wash sale rule applies. Your broker's computer does though.

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The 1099-B begins an intermediate wash sale accounting even if there is no ultimate wash sale.

Day 1: Buy 100 ABC for $10

Day 2: Sell 100 ABC for $5

Day 3: Buy 100 ABC for $4

Day 4: Sell 100 ABC for $10

So in the above example the cost basis for Day 3 is adjusted on the 1099-B and that due to the Day 4 sale but also due to staying out of the security for 30 days after Day 4. However, there is no code on the 1099-B for the adjusted cost basis.

If fact if a security is bought in several blocks but sold all-at-once with a limit order then there can be wash sales a few seconds apart on the 1099-B. (This historical situation may have been corrected for trades not re-entered.)

Finally, any transactions with a wash-sale code on the 1099-B those transactions must be itemized on the 8949. Since separating transactions creates sub-tallies within the total tallies, I would recommend just itemizing everything on the 8949. Of course there are also Form 8949 page tallies.

Actually, I have a portfolio software that outputs in a 8949 format but I still have to separate long-term from short-term and I have to separate reported security basis from non-reported security basis. Mostly, I input transactions and match the monthly statements and then at the end of the year I hit a button and output the 8949. Then the wash sale codes and adjustments must be edited into the software output because not all trading requires wash-sale accounting.

  • So it sounds like everything I will need is on the 1099-B, I will just have to transfer all that information over to the 8949? Also, what's the software you're talking about called? I'd like to check it out! – jimmyd Mar 27 at 22:45
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    Yeah, it's not too difficult to transcribe from the 1099-B to a PDF Form 8949. But the software I use is KBH Investor Accounting. – S Spring Mar 27 at 22:56

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