wash sale rule for multiple lots

Question

I am a bit confused by this specific scenario of buys, sells and how to calculate the cost basis for the lots I'm holding. This question is for USA tax purposes.

• Day1, buy 100 shares at $10

• Day2, buy 100 shares at $11

• Day3, buy 100 shares at $12

• Day4, buy 100 shares at $13

• Day5, sell 200 shares at $9

Assuming FIFO for determining the lot which is sold, my Day1 and Day2 lots will be sold for the Day5 sale. It seems to me there are 2 ways of calculating cost basis for the Day 3 and Day 4 lots that remain.

Method 1:

Total loss = $100 + $200 = $300

Increase basis of Day3 and Day4 both by $150 each

Method 2:

Break down the transaction into 2 steps, because two separate lots were sold.

• Step1:

  • Total loss on Day1 lot: $100

  • Adjust day2 lot cost basis: $1100 + $100

• Step2:

  • Total loss on Day2 lot: $1200 - $900 = $300

  • Adjust day3 lot cost basis: $1200 + $300 = $1500

So in method 1, the cost basis adjustment would be divided amongst Day3 and Day4 lots, whereas in method 2, cost basis adjustment would only fall on Day3 lot.

Which method is correct?

Answer 1

Since you're using FIFO, the proper way would be to increase the cost basis of the Day3 lot by $300, since that's the lot that would be sold next.

Note that this only makes any difference if you sell the Day3 lot alone in another tax year. If you sell the other lots in the same tax year as the Day1 and Day2 lots, wash sale rules do not apply since all of the transactions happen in the same tax year. If you also sell the Day4 lot in the same tax year as the Day3 lot, it doesn't matter how you allocate the wash sale loss - you'll end up with the same overall gain or loss.

Wash sale rules do not change the amount of gain or loss overall, they just potentially defer tax benefits from losses. There are many situations where you buy and sell within 30 days, but the wash sale rules do not apply because they make no effective difference in the tax owed.