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From Fidelity:

According to the tax code, short- and long-term losses must be used first to offset gains of the same type. But if your losses of one type exceed your gains of the same type, then you can apply the excess to the other type.

That makes it seem like if I have a long-term capital loss, it is supposed to go toward reducing long-term capital gains. But if I purchase the same (or substantially similar) stock within 30 days, making it a Wash Sale with long-term losses, what happens to the long-term capital losses?

Does the long-term status of the loss get transferred as part of the Wash Sale, but only becomes realized when the shares that received the cost basis from a Wash Sale are sold? Or does the long-term status of that loss disappear, and they become grouped with the shares that received the cost basis from a Wash Sale?

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The original holding period applies to the new shares. Per IRS Pub 550:

Wash sales. Your holding period for substantially identical stock or securities you acquire in a wash sale includes the period you held the old stock or securities.

Example:

  • You bought 100 shares of Company XYZ on January 1, 2020 at $100/share
  • You sell those 100 shares for $50/share on October 1, 2023.
  • On October 15th, 2023, you buy 100 shares of Company XYZ for $60/share.

The loss from the original shares is disallowed to due the wash sale rule and is added to the cost basis of your new shares. Your holding period start date is the purchase date of the original shares.

Therefore, you now hold 100 shares of Company XYZ with a cost basis of $110/share ($60 cost basis + $50 disallowed loss) with a "purchase date" of January 1, 2020.

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  • Thanks! Does that apply to all Wash Sales, the transfer of the holding period start date along with the additional cost basis? Even if the purchase of the substantially identical stock happened before the Wash Sales? Since that could actually cause the holding period start date to move forward in time.
    – morsecoder
    Dec 24, 2023 at 2:59
  • E.g. Purchase 10 shares on day 1, purchase 10 shares on day 2, sell the shares bought on day 2 for a loss -- the 10 shares bought on day 1 inherit the additional cost basis from the wash sale. Does that also change their holding period start date for those 10 shares to be day 2?
    – morsecoder
    Dec 24, 2023 at 3:03
  • @morsecoder I'm not sure. Pub 550 says that the holding period "includes" the original holding period, so it could be argued that it's the longer of the holding periods. Would have to look for a revenue ruling or tax court finding on that.
    – Stan H
    Dec 24, 2023 at 19:38

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