Which lots have to be sold in a wash sale?

Question

Here's the scenario:

I have multiple wash sales with the same company. Let's use Apple as an example where I'm day-trading in and out of Apple. The price continues dropping and I keep buying back at lower prices. Now, I understand that the deferred loss gets added to the cost basis of each subsequent sale until I finally sell the wash sale lot(s) and do not buy them back for the 31 day-period.

So my questions/concerns about these lots are:

(1) If I own 500 shares of Apple, but 400 are being held long-term and I am trading 100 of those shares (causing the wash sales) short term, to break the chain of the wash sale before year's end, do I just need to sell the 100 shares? Or do I need to completely exit all of my Apple stock (assuming the other 400 shares were NOT wash sale trades)? It would be a shame to have to sell all 500 shares, especially since 400 were not sold and re-bought again and were purchased at a very low price.

(2) My broker told me that most of my wash sales have already been reversed for this year. Does that mean there is no deferred loss to worry about? And, it is safe to re-buy those stocks and trade them as non-wash trades?

(3) If you have a gain, then it's not a wash sale... does that mean I could make 20 wash-sale trades at losses and the last trade becomes a gain so it wipes out the wash sale? (I figure that the increased cost basis could eventually become a loss, even if I made a gain, because if a stock trade began at $20/share and by the time my last wash trade was at $15/share - I bought the last trade at $14/share and made a dollar profit - but it was still less than $20, so it still might be a loss?)

(4) I saw a couple of videos online and read a couple of blog posts where someone had disallowed losses (I assume that means deferred losses carried to the following year) that caused huge taxable gains for the current year, even though he lost money. Is this possible? Should I make sure my wash-sale lots are closed out by year's end?

Thanks for all the help!

Answer 1

Let's start simple. Suppose you are just day trading 100 shares. Buy 100, sell 100, buy 100, etc. and you hold no other positions in your account. To incur a wash sale, you have to buy replacement shares within the 60 day window surrounding the date of the realized loss (30 days before or 30 days after). With a wash sale, the realized loss must be deferred and it is added to the cost basis of the replacement shares.

At any time during the year, if you have no position and you do not trade that stock until 31 days later, the books are closed on that sequence of trades.

Where this becomes a problem is the end of the year. If you have an open position at the end of the year that has an attached wash sale loss and the position is carried into the new year, the loss must be deferred to the subsequent tax year. To avoid this, close wash sale positions before the end of the year and do not trade this stock again for 31 days.

As an aside, when you close a short sale at a loss, tax law treats the transaction as occurring on the settlement date so make sure that your transaction date leaves enough time for settlement within the same calendar year.

Here's where your situation may get complicated. You own 500 shares of which you consider 400 shares to a long term hold. If the 400 shares are in another account and no wash sale occurred within 60 days of their purchase date, then there's no problem. If there was a wash sale then some or all of the 400 shares may be involved.

If all 500 shares are in the same account then it may be a different story. When shares are sold, a broker defaults to FIFO. In this case, you sold all of your 500 shares with your day trading. If you designated which shares to sell, carefully avoiding the sale of those 400 shares then you are in the clear.

I won't presume to give you wash sale advice. The wash sale topic is often a debate here. I would suggest two things. If you trust your broker's accounting, then accept his advice that most of my wash sales have already been reversed for this year. Plan B would be to purchase a quality tax program that handles this so that you can verify your broker's advice as well as the issue of the commingled 400 long term shares and your day trading.

And while it's not the answer that you want, if the wash sale amount is small and if you pay estimated taxes, it's not the end of the world to pay the extra taxes this year and consider the carryover loss as a portion of your first quarter payment.

And FWIW, here's an article that provides a lot of wash sale examples.