I have a bit of a weird situation, and am not 100% sure how the wash sale rules should apply (in the U.S.)

Lets say I have 100 shares of a mutual fund that I purchased over a year ago for $10 each, and then I have the following transactions1

  • day 1: sell 55 shares @ $8. remaining shares: 45
  • day 1: sell 55 shares @ $8. remaining shares: -10
  • day 2: buy 11 shares @ $7.5. remaining shares: 1
  • day 3: sell 1 shares @ $7. remaining shares: 0

My question is: Do I have a wash sale violation (WSV) of 1 share, or of 11 shares from the purchase of 11 shares? Since 10 of the shares are essentially closing a short position.

Option 1: all 11 shares cause a WSV:

  • day 1: sell 55 shares @ $8. LT loss: -$2*44=-$88. wash sale: -$2*11=-$22
  • day 1: sell 55 shares @ $8. LT loss: -$110
  • day 2: buy 11 shares @ $7.5. LT loss: $8*10 - $7.5*10 - $2*10 = -$15
  • day 3: sell 1 shares @ $7. LT loss: $7*1 - $7.5*1 - $2*1 = -$2.5

total LT loss: -$215.5

Since all shares purchased on day 2 have an adjusted holding period starting over a year ago due to the wash sale, my understanding is the the entire amount is considered a long term loss.

Option 2: only the 1 additional share causes a WSV:

  • day 1: sell 55 shares @ $8. LT loss: -$2*54=-$108. wash sale: -$2*1=-$2
  • day 1: sell 55 shares @ $8. LT loss: -$110
  • day 2: buy 11 shares @ $7.5. ST gain: $8*10 - $7.5*10 = $5
  • day 3: sell 1 shares @ $7. LT loss: $7*1 - $7.5*1 - $2*1 = -$2.5

total LT loss: -$220.5, total ST gain: $5

My gut feeling is that those 10 shares are not a WSV, because applying the wash sale rule in this case is actually in my favor, because I end up with a potentially lower tax burden, with $5 in LT loss basically offsetting the $5 of ST gain.

However, in my brokerage statement, they did list a wash sale for the first transaction, with an amount based on all of the shares in the 3rd transaction. But there were other oddities with how they accounted for this set of transactions that make me think they may not have been accounted for correctly. e.g. the wash sale amount didn't seem to be added to the basis anywhere, and the last transaction was actually listed as a short term loss instead of a long term loss, which I'm pretty sure is incorrect.

1Yes, this actually happened. I was trying to close out the position, but my brokerage's online interface wouldn't let me close it out, because the total amount was over their maximum single-transaction amount. My only other option was to manually enter 2 sell orders, but the interface wouldn't let me enter the number of shares to sell, it required a dollar amount. And since you can't know the exact price the order will be executed at, I had to guestimate. I intentionally guestimated high, under the assumption that the order would be reduced to only the shares available in my account, since I hadn't enabled any sort of shorting functionality in my account. Much to my surprise, the full amount of both sale orders went through, and I ended up with a negative balance (i.e. a short position) in that mutual fund.
I don't remember exactly why I ended up buying slightly more shares than needed to close the short position in the next to last transaction. I think the interface may not have given me the option to close out the position, presumably because it wasn't expecting a negative balance. So I had to guestimate based on dollar amount again, and then could finally enter an order to fully close out the position in the last transaction.

  • 1
    I'm no authority on this but here's my take. Flipping over from long to short or vice versa has nothing to do with wash sales so the first 3 transactions are OK (buy 100 and sell 55 twice). When you then buy 11 shares, 10 are for covering the short position and 1 share is a replacement share, triggering a wash sale violation. So I agree with you: "My gut feeling is that those 10 shares are not a WSV." As for your footnote, forcing you to close positions by the dollar amount rather than in share amounts sounds rinky-dink. Any chance that this is Robinhood? – Bob Baerker Jul 21 '20 at 13:12
  • Not Robinhood. It was the brokerage arm of a bank that I use. – JesusFreke Jul 21 '20 at 17:51

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