Do IRS wash sale rules apply to gains as well as losses?

Question

Consider the following two situations:

Situation 1

• 5/1/2018 -- buy 10 shares XYZ at $100
• 5/1/2020 -- sell 10 shares XYZ at $50 (and claim a long-term capital loss of $50/share)
• 5/15/2020 -- buy 10 shares XYZ at $70

This clearly falls under IRS wash sale rules:

A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you:

• Buy substantially identical securities,

• Acquire substantially identical securities in a fully taxable trade, or

• Acquire a contract or option to buy substantially identical securities.

Internal Revenue Service rules prohibit you from deducting losses related to wash sales. For more information about wash sales, read IRS Publication 550, Investment Income and Expenses (Including Capital Gains and Losses).

Situation 2

• 5/1/2018 -- buy 10 shares XYZ at $70
• 5/1/2020 -- buy 10 shares XYZ at $50
• 5/15/2020 -- sell 10 shares XYZ at $100 (and claim a long-term capital gain of $30/share)

Is the tax treatment of the 5/15/2020 sale correct? (long-term rather than short-term gain of $50/share)

Answer 1

You asked:

Do IRS wash sale rules apply to gains as well as losses?

You answered your own question with:

A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you ...

As for your second question:

Is the tax treatment of the 5/15/2020 sale correct? (long-term rather than short-term gain of $50/share).

In the U.S., when you sell a portion of your holdings you can elect to choose which shares you want sold. FIFO stands for First In, First Out. LIFO stands for Last In, First Out.

Your broker must have an online process for share verification or you must obtain written confirmation from your broker that verifies the method chosen. Without such verification, the IRS will conclude that you never made an election and will default to the FIFO method.

Answer 2

The wash sale rule says that a loss that would otherwise be deductible is not deductible if you buy the same security within 30 days of the sale (either before or after). It does not mention, or apply, to gains. It doesn't make sense to try to apply it to gains, since they are not deductible.

From the SEC quote in your question (emphasis mine):

A wash sale occurs when you sell or trade securities at a loss and within 30 days before or after the sale you:

If you don't sell at a loss, it's not a wash sale.