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It's Jan 1st and I buy 1 share of XYZ for $10.

Jan 2nd I sell it for $9.

Jan 3rd I buy it back for $9.

Jan 4th I sell it for $8.

Final loss: -$2

I understand this is a wash sale. But in my year end taxes, how does this work? Does the loss of -2 completely disappear? Or since I have closed out of the position does it apply?

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On Jan 2nd you realize a loss of $1. When you buy the share back on Jan 3rd, you create a wash sale and the $1 loss deduction is disallowed (temporarily) and must be carried forward.

The disallowed loss is added to the cost of the replacement share and when you sell on Jan 4th, you realize the $2 loss, for tax purposes.

All of this just means that it's an accounting exercise as long as the wash sale violation shares are sold in the same tax year. IOW, instead of -1 -1 = -2, it's 0 -2 = -2. Same result just different bookkeeping.

If instead the first realized loss and replacement share purchase occurs in December of 2020 but you sell the second position in January of 2021, you do not get the deduction for 2020 and you get to deduct all of it in 2021.

Here's a good explanation of the wash sale rule.

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  • Nice. Inspired to add this to our FAQ. We've had other wash sale questions, but this one feels like the most simple example of such an occurrence. If anyone would like to suggest an addition one for a more complex example, you can propose here or at the FAQ. – JTP - Apologise to Monica Jan 17 at 13:19
  • Thanks for the acknowledgement. Where is the FAQ list located? – Bob Baerker Jan 17 at 14:10
  • linked in my comment to you ^^ (no offense to Quid's answer, but yours had the proper accounts/details.) – JTP - Apologise to Monica Jan 17 at 14:10
  • LOL. Sorry for my inattentiveness. ^^ – Bob Baerker Jan 17 at 14:30
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As long as these are all the transactions of XYZ and you don't reopen the position within 30 days you have a tax loss of $2 that you can deduct.

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The common misconception is that a wash-sale permanently disallows adding the loss to your taxes. That is simply incorrect; it temporarily disallows it - because you bought the same security, it is 'parked' in the newly bought pieces, and once you sell those, it comes back out (unless you buy them again within 30 days, then it get's 'parked' again, etc.).

Generally, the wash sale rule delays your losses for tax purposes.
Nothing more, and nothing less.

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