Let's say I buy 20 shares of stock at $100 each, and later sell half of those shares at $90.

Less than a month later, I buy back 5 shares of the same stock at $95. The stock then rises to $101 and I sell one share.

That first sale of ten shares, where I realized a loss of $100, would be considered a wash sale because of the later purchase back into the same stock. So I can't directly consider it a capital loss, but I can add it to the basis of later sales, right?

E.g. under FIFO ordering without the wash sale, the cost basis for the later $101 sale would be $100 — and it would be a capital gain of $1. But I can add the $100 loss from the wash sale to that $100 basis, and then it would be considered a capital loss of $99.

[Do I have this right so far? Here comes my actual question…]

Let's say the market continues to go up and down, and soon I sell another 5 shares at $95. With the FIFO ordering, these would still be considered to have a $100 basis and so this would be another loss ($25) — and so if I subsequent buy any shares at any price it would be another wash sale. Say I do.

Now, does this later/second muddle with the $25 loss that ends up getting considered another wash sale have any bearing on how I account for the earlier $101 sale?

I guess what I'm really asking is in a short-term trading scenario where I'm continuously (and partially!) getting into and out of positions, at what point does the loss from a wash sale actually get applied to something? Is it simply the first profitable sale? Or do the wash losses just all keep buffering and buffering and buffering up until I sell all of that stock and then leave it alone for more than 30 days?

  • You can also circumvent wash sale rules by trading functionally similar assets that give you the same exposure. Many duplicate ETFs are launched solely to capture the market of people needing to avoid wash sale rules. – CQM Apr 13 '19 at 11:35
  • I'm not trying to avoid them, I'm trying to understand how to account for trades that happened last calendar year. – natevw Apr 13 '19 at 16:16
  • I have 3 suggestions to make your life easier. (1) Avoid wash sales, (2) Close all positions by the end of the year and stay out for 31 days, or (3) Use a tax trading account management program like Gainskeeper or Tradelog. I'm a scale in/scale out trader and wash sales make my head hurt. If I can't do (1) and (2) then I do (3) :->) . – Bob Baerker Apr 13 '19 at 17:56

I think the answer falls out of the IRS's Publication 550 section on 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.

So to reiterate my example and put some dates on it as well:

  1. Day 0 — buy 20 shares of stock at $100/share
  2. Day 60 — sell 10 shares at $90/share
  3. Day 65 — buy 5 shares at $95/share
  4. Day 85 — sell 1 share at $101/share
  5. Day 90 — sell 10 shares at $95/share [changed]
  6. Day 96 — buy N shares at $X/share

The key part I was missing is that any wash sale loss needs to be considered per-share rather than as a whole. So in step #2, I need to track the loss specifically as $10/share on 10 shares rather than a general "$100 loss". Then as of step #3, I could still book a $10/share loss on 5 of those shares. The rest of the loss gets applied to the cost basis of some of the original (step #1) shares, as if I had bought the first 5 of the remaining ten shares at $110/share instead of $100.

Now in step #4, I am actually selling at a $9/share loss as well since the basis for this $101 share has been adjusted to $110. Because it is less than 30 days from the buy of step #3 this is already a wash. This gets applied to the first of the remaining shares of the step #1 block.

At this point, as we come to step #5 (which I changed from my original example to cover more territory…) the cost basis of the shares I hold from earliest to latest would be:

  • 1 share with basis $100+10+9 = $119/share
  • 8 shares with basis $100+10 = $110/share
  • 5 shares with basis $95/share

If I sell ten of these shares at $95, I am actually selling…

  • 1 share at a $24/share loss
  • 8 shares at a $15/share loss
  • 1 share at a $0/share break-even

But the first five of these are again wash sales, due to step #3 still being within the ±30 day window! I am now holding:

  • 1 share with basis $95+24 = $119/share
  • 3 shares with basis $95+15 = $110/share

…and I have 1 outstanding $15/share "wash sale" loss, and a possible capital net of 4 shares times $15/share loss (plus 1 share at $0/share break-even).

Finally bringing us to step #6. If I haven't completely muddled this already […again], here's my understanding:

  • if N is 0, i.e. I stop trading and leave off for more than thirty days, I cannot book the 1 pending $15/share wash loss. I do book a net capital loss of $60 from the 5 non-wash shares.
  • if N is 1 or more, the cost basis of the first share I buy gets the $15/share outstanding wash loss added to its price. The next four shares after that also create a wash of the earlier $15/share losses. (The sixth share in a sense also gets adjusted if you consider $0/share a "loss"…) The cost basis for the seventh and following shares is simply the price, assuming no further activity for the next 30 days.

There's at least one other rule that may come into play here:

Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.

…but I think this answer is complicated (and potentially wrong!) enough as it is already…

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Unfortunately for the cause of human logic, the wash-sale disallowed losses on the 1099-B, and within a particular security section, are not a cumulative-net but a sum of disallowed losses. That result means that the disallowed loss does not adjust the basis of the next position unless that next position is the last position within the 30 day time frame.

The sum of disallowed losses will adjust the basis of the last positions as within the 30 day time period.

Since the 1099-B performs and reports the wash-sale accounting it would be difficult to present a tax accounting of the tax payer's own opinion.

If there are wash sale notes on the 1099-B then that section of the 1099-B must be itemized on the 8949. I suppose that we are headed for a future where the 8949 would only be required if disagreeing with the 1099-B.

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