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Consider the following scenario:

  • On Jan 1 I bought 10 shares of XYZ for $10 each on Jan 1, and sold them for $8 each on Jan 2, resulting in a loss of $20 ($2/share)

  • On Jan 10 (less than 30 days later), I bought 30 shares of XYZ for $10 each, and sold them on Dec 31 for $11 each, resulting in a profit of $30 ($1/share)

  • On Jan 1 of the following year, I buy 10 shares at $10 each, and sell them the following day for $10 each, resulting in no net gain.

I understand that the first transaction is a wash sale, and that the disallowed loss of $20 should be added to the basis of the second transaction. The question is this: do I simply add $20 to the basis of the second transaction, or do I split the the second transaction into two transactions, 1 of 10 shares (the replacements shares causing the wash) and 1 of 20 shares and add the $20 only to the former? I ask because the first approach does not result in an additional wash sale, whereas the second does.

With the first approach, I would simply report the transaction on 8494 as a sale of 30 shares with a cost basis of $320, proceeds of $330, and a gain of $10. I have $10 gain for the year.

With the second approach, I would report it as a sale of 10 shares with a basis of $120, proceeds of $110, and a (disallowed) loss of $10. I would also report a sale of 20 shares with a basis of $200, proceeds of $220, and a gain of $20. My gain for the year would be $20, and the disallowed loss would be added to the basis of next year's shares, allowing me to take a $10 loss next year.

Which approach is appropriate? The discussion in IRS Pub 550 talks about determining which shares are replacements, but none of its examples involve splitting a transaction like I've done in approach #2.

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The question is this: do I simply add $20 to the basis of the second transaction, or do I split the the second transaction into two transactions, 1 of 10 shares (the replacements shares causing the wash) and 1 of 20 shares and add the $20 only to the former?

The latter. You bought 10 replacement shares and then 20 more shares.

Yes, you have a wash sale on your hand for the Dec. 31st/Jan. 1st set of transactions. If you have not purchased any more of the shares from the sale on Jan. 2nd until Feb. 1st (30 days), then you can close that position with the Jan 2nd. sale and recognize the disallowed loss then. It does mean the loss is carried into the next year.

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  • Ok, that makes sense. Just two confirm, it's ok that this will be two transactions on form 8949 even though it's only one transaction on the 1099B I received?
    – user115619
    Commented Mar 7, 2023 at 23:40
  • @user115619 you can make a row per share on form 8949 if you want, but if you're combining multiple shares - you can only combine trenches with the same cost basis. So yes, you'll need at least two rows.
    – littleadv
    Commented Mar 8, 2023 at 1:17

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