-1

From 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.

This is remarkably ambiguous -- what does "include the period" technically mean? I'm seeking to break this down further with concrete examples.

Every wash sale has 3 components:

  • B = The buy date of the stock sold at a loss
  • S = The sell date of the stock sold at a loss
  • R = The repurchase date of a substantially identical stock

S has to come after B, but R could be any time within 30 days of S. That gives us three possible orders for the 3 components of a wash sale -- RBS, BRS, and BSR -- just by considering the possible positions of the R relative to BS.

Case 1 - RBS

An individual buys 1 share of XYZ on Jan 1, 2024. Then they buy 1 more share of XYZ on Jan 10, 2024. Then they sell the second share of XYZ at a loss on Jan 15th, 2024.

Here, "including the period you held the old stock or securities" could mean:

  1. Adding 5 days (the duration between B and S) to the holding period calculation of the share bought on Jan 1st (for determining if the eventual sale of the Jan 1st share is taxed at short/long term rates)
  2. Not adjusting the holding period at all, since Jan 1st... is already inclusive of the Jan 10-15 date range.

Case 2 - BRS

An individual buys 1 share of XYZ on Jan 1, 2024. Then they buy 1 more share of XYZ on Jan 10, 2024. Then they sell the first share of XYZ at a loss on Jan 15th, 2024.

Here, "including the period you held the old stock or securities" could mean:

  1. Adding 14 days (the duration between B and S) to the holding period of the share bought on Jan 10th
  2. Adjusting the start date of the holding period back to Jan 1st, which essentially adds 9 days to the holding period.

Case 3 - BSR

An individual buys 1 share of XYZ on Jan 1, 2024. Then they sell that share at a loss on Jan 10, 2024. Then they repurchase 1 share of XYZ on Jan 15th.

Here, "including the period you held the old stock or securities" could mean:

  1. Adding 9 days to the holding period of the share bought on Jan 15th
  2. Adjusting the start date of the holding period back to Jan 1st, which essentially adds 14 days, even though the original B was only held for 9 days.
4
  • 1
    Which share you sell doesn't matter. Shares are fungible. That's why the rule says "substantially identical".
    – keshlam
    Dec 26, 2023 at 15:01
  • 1
    Is there a question somewhere in all this text? Also, it seems duplicative of your other question here
    – littleadv
    Dec 26, 2023 at 19:54
  • @keshlam Yes, I don't disagree, but the duration of ownership does matter and I'm looking to understand the exact formula for translating duration of ownership from a wash sale to the new substantially identical lot.
    – morsecoder
    Dec 26, 2023 at 20:36
  • @littleadv I have applied a few edits in attempts to make the question clearer. And yes it is related to the answer my other Q, but not a duplicate, since this asks for much more technical detail / specification to the generic problem of holding period adjustments during wash sales, not just the long-term losses scenario.
    – morsecoder
    Dec 26, 2023 at 20:41

2 Answers 2

1

You quoted the IRS Publication 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.

I'm not sure what makes you think this is ambiguous, seems pretty explicit to me. The IRS expects you to use the longest possible holding period, no matter the order of transactions. This is to prevent an abuse vector when you'd try to extend the short term capital gains/losses period through wash sales.

4
  • Exactly. No loophole.
    – keshlam
    Dec 27, 2023 at 0:33
  • So if you buy a share on day 1, sell it at a loss on day 2, re-buy on day 30 -- then after the wash sale transfer of cost basis and holding period, your new share has a 30 days holding period already? That doesn't seem quite right, because you've really only held the share for 1 day, and it makes it easier to break into the long term capital gains tax rates.
    – morsecoder
    Dec 27, 2023 at 18:57
  • According to one user on this forum, they found that the periods of holding were added together in their income report from their brokerage, rather than setting the acquisition date to the earlier of the two dates.
    – morsecoder
    Dec 27, 2023 at 18:59
  • 1
    I said "longest possible holding period", where did you see anything about dates? You held share A for 1 day, you held the replacement share B for 60 days - your total period for the share you end up selling at the end is 61 days. Whether you bought share A before share B or after doesn't matter.
    – littleadv
    Dec 27, 2023 at 19:29
0

Questions like this make my head hurt. The IRS provides an example on page 56 of publication 550:

Example 1. You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050.

The holding period of the wash sale securities is added to the holding period of the repurchased securities.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .