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Here is my simplified wash sale scenario.

Let's say I traded only 2 stocks last year:

  • XYZ for a total of $500 wash sale loss.
  • ABC for a total $1000 gain.

Txns for XYZ:

  1. 05/28/2019 BUY 100 shares for total $2000
  2. 09/02/2020 SELL 100 shares for total $1000
  3. 09/15/2020 BUY 100 shares for total $500
  4. 11/02/2020 SELL 100 shares for total $1000

Txns for stock ABC:

  1. 07/01/2019 BUY 10 shares for total $1000
  2. 11/18/2020 SELL 10 shares for total $2000

If I disregard the wash sale rule, my tax gains for the year should be +500$.

But my broker reports a wash sale disallowed in field 1g on 1099-B and sets the loss for XYZ to the year at 0. Here is the report

1a.         1b          1c       1d.    1e.     1g Wash Sale Disallowed       Gain or Loss

XYZ 100  05/28/19     09/02/20   1000   2000              **1000**                   **0.00**

And now I have to pay taxes on +1000$ gains for the year instead of just +500.

What should I do?

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If the replacement shares for a wash sale are closed in the same tax year as the realized loss and there is no subsequent wash sale violation, you have a lot of tax accounting adjustments but the total loss can be deducted in that tax year. It's only a problem if the replacement share position isn't closed in that tax year and therefore the apportioned wash sale violation cannot be deducted until the next tax year, assuming no additional wash sales that further delay deducting the loss.

You've posted your broker's wash sale explanation for the 100 shares sold on 9/02/20. It is correct. But where is their accounting for the replacement shares sold on 11/02/20?

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    Thank you, Bob! So if I understand correctly, the adjustment is essentially added to the cost basis of the follow up purchase so no money is ever "lost".
    – Spasski
    Feb 21 at 4:53
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    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. See Tradelog. Feb 21 at 5:43

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