better understanding wash sale rule

Question

This is for USA tax purposes. I find wash sale rule simultaneously a simple and complicated concept. I kind of understand overall idea, but miss the details. Surprisingly, I couldn't find many examples that would shed more light into matter, and help build a better understanding.

I have two questions.

Question 1

This is the typical definition of wash-sale rule:

The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss and, within 30 days before or after this sale, buys the same or a substantially identical stock or security, or acquires a contract or option to do so. 1

Consider this scenario:

• day 1: bought 100 shares at $10
• day 2: sold 100 shares at $9
• day 3: bought 100 shares at $8
• day 4: sold 100 shares at $7

Now, looking formally at the definition one might conclude that both: day 2, and day 4 sales are wash sales:

• for day 2 sale, there is a purchase (day 3) that happened within 30 days.
• for day 4 sale, there is a purchase (day 1) that happened within 30 days.

I believe, this is not how things work in this case. Instead, my understanding:

• day 2 sale will be considered as wash-sale.
• day 3 base cost will be adjusted by $100
• day 4 sale is not a wash sale, and IRS allows to deduct -$200 of capital loss

Question: Am I correct regarding how wash sale rule applies for this scenario?

Question 2

Let's say I trade some stock FOO numerous times within a week. I buy / sell, re-enter position, partially close. Some of trades are profitable, some are not, etc. At the end of the week, I close the position, I no longer hold any FOO shares

Question: Is it true, that regardless, whether wash-sale exists or not, I'll be able to deduct the same amount of loss?

My understanding, that when wash sale disallows losses, it re-adjusts base cost, and eventually this leads to the same losses I can deduct. Thus, if all transactions happen within a week of same taxable year, there is no difference wether wash sale rule exists, or not?

Answer 1

In a comment you mentioned you were unclear about the situation where the 2nd purchase is done just before the 1st sale. This provision is to close a very big loophole.

There is a flaw that you see in the timeline you presented:

Consider this scenario:

day 1: bought 100 shares at $10
day 2: sold 100 shares at $9
day 3: bought 100 shares at $8
day 4: sold 100 shares at $7

Most people who want sell shares and re-buy them so they can claim the loss would prefer to make the time period between the sale and repurchase instantaneous. The timeline would look more like this scenario:

• day 1: bought 100 shares at $10
• Many days later: sold 100 shares at $9
• 10 seconds later: bought 100 shares at $9
• Many days later: sold 100 shares at some other price.

They are afraid if they waited a day they could miss a jump in price. If the law only addressed the situation where the repurchase was done after the selling of the shares, then people would get around it by doing the following:

• day 1: bought 100 shares at $10
• Many days later: bought 100 shares at $9
• 10 seconds later: sold 100 shares at $9
• Many days later: sold 100 shares at some other price.

To close the loophole the law makes the required waiting period 30 days in either direction.

Note: I agree that in the original question the answers are:

1. You were correct in the scenario described in this question. It is the buy that triggers the wash sale.

2. Once you close the position and wait out the 30 day time period then all the losses will be accounted for.

Answer 2

#1. That's right. When a wash sale occurs, the "loss" gets added to the cost of your new purchase. What might be confusing you is that, counter-intuitively, wash sales only happen when you buy.

Note that buying substantially identical shares includes shares in other accounts, even shares bought by your spouse. And if you trigger a wash sale buying shares inside a tax-advantaged account, the cost basis and the opportunity to deduct losses would be completely gone.

#2. Yes. Once you sell all your shares, you can deduct the losses no matter what. Wash sales are only a concern for those trying to deduct losses while maintaining some equity exposure (i.e. tax loss harvesting).

Answer 3

Question 1:

Day-2 is a wash sale that requires that the cost basis of the replacement shares bought on Day-3 be adjusted by the loss incurred on Day-2. Day-4 realizes all losses and they can be claimed as long as you do not acquire replacement shares in the next 30 days. Note that for losses realized at the end of the year, this 30 day period extends into January.

Question 2:

Same answer. All losses can be claimed as long as you do not acquire replacement shares in the next 30 days.

Misc:

The wash sale rule affects when you can claim losses. It does not change the amount of the loss.

Though not applicable to your question, note that for short sales, tax law treats the transaction as occurring on the settlement date so you must close the position two business days before the end of the year (T+2 settlement)