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This question is prompted by my answer to the question about wash sales.

I'm not going to repeat everything in the question or my answer. The question had a simple answer: technically Maybe but as a practical matter, No.

However, in arriving at this conclusion, I think I have found a way around the wash sale rule. According to J.K.Lasser Your Income Tax 2018, page 558 (hard copy):

Loss on the sale of part of a stock lot bought less than 30 days ago:

If you buy stock and then, within 30 days, sell some of those shares, a loss on the sale is deductible; the wash sale disallowance rule does not apply.

....the wash sale rule does not apply to a loss sustained in a bone fide sale made to reduce your market position.

Thus, if the buyer (TB) bought 2,000 shares of Stock X and then sold 1,000 shares of Stock X at a loss less than 30 days later, with no repurchase within the time limit, TB could deduct the loss on the 1,000 shares. (The motivation for this could be, for example, that TB wanted a long-term position in the stock, but also wanted to speculate in the short term on a blip in the stock, and wanted to be able to get out quickly with a deduction if the blip he expected did not happen.)

However, if TB bought 1,000 shares of Stock X on D-day and then bought 1,000 shares on D-Day + N (where N is less than 30), and then sold 1,000 shares at a loss on D-Day + M (where M is more than N, but less than 30), then TB could not deduct the loss on the 1,000 shares.

Is this correct? The effect on the holdings in TB's portfolio is the same in both cases, although the values of Stock X may be different.

The first case looks like it is made to reduce your market position, but has the effect, intended or not, of working around the wash sale rule.

  • "clever way to run around the wash sale rule." Only for a time traveller. – Ben Voigt Jun 1 at 18:09
  • @Ben Voigt Case 1: Buy 2,000 shares on Day 1. Sell 1,000 shares at a loss on Day 2 through Day 29. Case 2: Buy 1,000 shares on Day 1. Buy 1,000 shares on Day 2. Sell 1,000 shares at a loss on Day 3 through Day 29. Same effect on your holdings. Deduction in Case 1. No deduction in Case 2. This isn't time travel. Let me know how I can make the Q clearer? Of course, you are making a bet on the movement of the stock, but that applies to every stock transaction. – ab2 ReinstateMonicaNow Jun 1 at 18:17
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The policy intent of the wash sale rule is to stop "tax loss harvesting": you hold some shares and want to keep them, but they've gone down since your purchase and so if you sold and immediately repurchased them you could get a tax benefit from the loss.

A very narrowly drafted rule would literally apply to that case: you sell some shares and afterwards immediately repurchase them. But then people would wait a while, or do the purchase in advance of the sale. So it has to be widened enough to catch a decent proportion of those cases. That has the possibly unintended consequence of also catching your second case, but not your first case.

So what you've found is more of an "anti-loophole": in your second case, the purchaser may not be trying to harvest a tax loss, particularly if N is small and M is large, but they get hit by the wash sale rules anyway. In the first case, they clearly aren't trying to harvest a tax loss because at the time they bought the extra 1000 shares, they didn't know they would go down.

  • I'm attempting to think this through again. In my second case, the purchaser sees the price go down and makes a second purchase in advance of the sale to preserve his position, which he thinks is good in the long term. He gets hit by the wash sale rule, as intended by the drafters. In my first case, the purchaser makes an investment in the short term, which results in a loss, half of which he then harvests and deducts, but it still looks good enough to keep some of it in the long term. The wash sale rule does not apply. Neither investor has a bright future. My head aches. – ab2 ReinstateMonicaNow Jun 1 at 21:36
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    @ab2 Yeah, I was thinking it over again after I wrote my answer and I think a lot depends on the values of N and M. If N = 1 and M = 29, it's very close to your first case. If N=28 and M=29, perhaps the purchaser is trying to harvest. – GS - Apologise to Monica Jun 1 at 21:42
  • Agree. Always best to be as quantitative as possible. – ab2 ReinstateMonicaNow Jun 1 at 21:47
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I don’t think it’s a loophole because the intent is different in each case, and case-2 thinking doesn’t work well with case-1 execution.

If you bought some shares and wanted to harvest the loss by a wash sale, you’d get case 2.

But if you wanted to do this ahead of time by your potential loophole, you’d be buying some of the shares with a view to making a loss. This isn’t rational - you might as well donate the expected loss to a tax-deductible charity and get the tax rebate without going through the stock market.

So your summary answer for the linked question works here as well: technically, maybe, but as a practical matter, no.

  • I think of Case 1 as someone speculating on a short term blip (perhaps after a significant fall) and however that worked out, wanting to have a long term position and be able to take a loss if the short term speculation did not work out. I didn't think of someone deliberately taking a loss to get a deduction. – ab2 ReinstateMonicaNow Jun 2 at 5:24
  • @ab2 That's not the same as gaming the system for a wash sale, though. – Lawrence Jun 2 at 10:39

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