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Consider a person who repeatedly changes allocation between 2 securities within a few days, by selling the security whose prices went up and buying the security whose price when down.

Is it possible to have profits before taxes and yet loss after taxes, due to the Wash Sale rule? Do I understand correctly that there'll be a 30% tax on the profit-making security and the loss won't be deducted on the loss-making security because of the frequent trading, and therefore a loss after tax could result, despite profit before tax?

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EDIT: The above is a wrong example, as pointed out below by glibdud. I will try to think of a better example. In the meantime, my question/thought is... assume that you have a small net gain from all your trades. Can that profit become a loss after tax, especially considering frequent trades in less than 30 days? Because the tax isn't on the overall gain/loss but on individual trades.

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  • Where is the sale for loss in this scenario that triggers the wash sale rule?
    – glibdud
    Jun 5, 2020 at 23:57
  • @glibdud I will try to come up with a better example. My question/thought is... assume that you have a small net gain from all your trades. Can that profit become a loss after tax, especially considering frequent trades in less than 30 days? Because the tax isn't on the overall gain/loss but on individual trades.
    – Zesty
    Jun 6, 2020 at 9:51
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    Federal income tax is actually computed on your 'total' income (after some exclusions) less deductions, not just investments, all for a tax year. However the incremental tax attributable to investment gains/losses can be considered computed (differently) on your net short-term and long-term gains, not including loss items deferred because of wash-sale.
    – dave_thompson_085
    Jun 7, 2020 at 4:25

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Maybe it's me but I couldn't make any sense of your data based on the way you displayed it. IMO, here's an example of a clearer way to display it.

With wash sales, losses must be deferred. If all trades are made and closed within the same calendar year, wash sales won't affect taxation because all trades made within one year can only be short term capital gains. The wash sales are just accounting details. Whether it's gains claimed as 2 + 2 = 4 or 3 + 1 = 4, it's still a gain of 4.

A wash sale becomes problematic only if it is a carryover wash sale. In this instance, the loss occurs in one year and the replacement shares are not sold in that same year. That means that the loss is deferred until the second year (or later). Deferral of the loss means that one might not lower one's taxes this year. It could also mean nothing because you have already exceeded the maximum cap gain deduction of $3k.

It might be possible that there's some permeation where loss deferral results in LTCG versus STCG treatment and when combined with a significantly different income each year, there could be variable tax affects. If so, that's a fringe situation. I'll leave it to others to concoct such possibilities.

You asked:

Assume that you have a small net gain from all your trades. Can that profit become a loss after tax?

Taxation takes a portion of your gains, based on your tax bracket. It does not take away all of your gains and take more as well.

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  • Ah. My understanding of taxation was totally wrong. "Taxation takes a portion of your gains, based on your tax bracket. It does not take away all of your gains and take more as well." So, if I have a $100k capital gain on one stock and $90k capital loss on another stock, I would be taxed on the $10k net capital gain, correct, not on the $100k capital gain on the first stock?
    – Zesty
    Jun 6, 2020 at 13:42
  • @Zesty - If the $90k is an allowable loss (not deferred due to a wash sale) then yes, the net $10k gain would be taxable.
    – Bob Baerker
    Jun 6, 2020 at 14:55
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    @Zesty+ but if the (only) loss is deferred, you pay tax on $100k, depending on your other income & status likely at 24% shortterm or 15% longterm, and that does exceed your actual net gain of $10k. (The deferral is added to basis and gives you a loss or reduced gain in the future unless you die or donate to charity, but not now.) I think that was the point of your question.
    – dave_thompson_085
    Jun 7, 2020 at 4:24

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