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following is a wash sale example I am confused about(all trades are on the same stock):

  1. Day 1: Buy 100 shares at $110
  2. Day 2: Sell 100 shares at $100
  3. Day 3: Buy 200 shares at $95
  4. Day 4: Sell 100 shares at $90

Assume we use the FIFO accounting method instead of using specific identification of shares. Day 2 sell would be a wash sale since half of the Day 3 buys would be the replacement purchase, and that half of Day 3 buy will have an adjusted cost basis of $105. Day 4 would be selling that half(with cost basis of $105), realizing a loss. The question is whether the sell on Day 4 is a wash sale.

If one can take the other 100 shares from Day 3 as replacement, then yes Day 4 is a wash sale. But I happen to see this "one bite of the apple" rule from Example 3 of page 7-8, which says the other half of Day 3 buy

"cannot serve as a replacement for a loss on a sub lot that belongs to the same parent lot".

If this rule is true then Day 4 is not a wash sale since no legit replacement can be found here.

I asked a similar question on Bogleheads but haven't got clear answer, hence wanted to what people think here. Thx

  • More info is needed, specifically when the end of year falls and the duration between transaction. Depending on that, there may be no wash sale at all. – D Stanley Aug 17 at 19:07
  • @DStanley I agree more trading and different settings may change the conclusion, but what I am hoping to find out is in this particular setting and assuming no more trading activities, is Day 4 sell a wash sale and if it is which lot is the replacement buy? I would think this is not some kind of rare case if people trade a bit often, but unfortunately I haven't been able to see many discussions on this yet – John Aug 17 at 21:13
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Your link is to something other than IRS Publication 590. The IRS states this:

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

  1. Buy substantially identical stock or securities,
  2. Acquire substantially identical stock or securities in a fully taxable trade,
  3. Acquire a contract or option to buy substantially identical stock or securities, or
  4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

As well as this:

You continue to have the burden of proving your basis in the specified shares at the time of sale or transfer.

FIFO. If your shares were acquired at different times or at different prices and you cannot identify which shares you sold, use the basis of the shares you acquired first as the basis of the shares sold. In other words, the oldest shares you own are considered sold first. You should keep a separate record of each purchase and any dispositions of the shares until all shares purchased at the same time have been disposed of completely. Table 4-2 illustrates the use of the FIFO method to figure the cost basis of shares sold, compared with the use of the average basis method (discussed next).

The underlying link provided seems to be expanding the IRS directions out with florid language, but is in fact keeping track of the disallowed loss by tying the basis to the corresponding shares and getting in the weeds describing these as "sub lots". I will admit I don't understand the point about "bites of apples"

On Day 2 you have a (1000) loss. On day 3, because it is within 30 days, day 2 is a wash sale. You defer the loss on day 2 and add 1000 so the position's new basis is 2000*95+1000, or 20,000, or one lot at 10,500 and one lot of 9,500.

On day 4, you sell at 9000. This is a loss and within 30 days, so loss is deferred and added to the basis of the remaining position. It does not matter which lot you use. You bought them on the same day, so they are both FIFO candidates.

Sell the 10,500 lot: loss of (10,500-9000) or 1,500 is deferred and added to the 9,500 basis of the other lot. Your basis for the 100 shares you continue to own is 11,000.

Or, sell the 9500 lot: loss of (9,500-9000) or 500 is deferred and added to the 10,500 basis of the other lot. Your basis for the 100 shares you continue to own is 11,000.

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  • On Day 3, the 100 shares whose cost basis was adjusted to $105, also got their holding period adjusted, and hence effective trade date becomes Day 1(for tax purpose), making its trade date earlier than the rest 100 shares(Day 3). Besides, when you sell the $10,500 lot, you can only defer the $1,500 loss to the $9,500 basis when the later is a replacement, and the "one bite of apple" says you can't do this because the lot of $9,500 basis has the same "parent" as the lot you are selling, and this is really where I am confused, i.e., is this rule considered true by IRS and accountants? – John Aug 17 at 21:03
  • @John I still don't know what the "one bite of the apple" is supposed to mean. The IRS regulations have you add the deferred loss to the basis of the position and apply it to the next lot you sell. Should that lot also have deferred loss, you repeat: add the basis to the position and apply to the next lot sold and so on until the running 60 day window ends or you close the position and stay out for 30 days. Whether the lot you choose to sell is named-shares or FIFO (and I see you're probably right about the "retroactive to day 1" FIFO sequence) the IRS regulations handle it. – user662852 Aug 21 at 15:36

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