"Healing" a wash sale with excess replacement shares

Question

At the beginning of 2024 I owned 1900 shares of CMP in two brokerage accounts and I made multiple buy and sell transactions in 2024.

So far I've made the following transactions in 2024 (all in taxable accounts):

• 6/4/2024 Buy 400 shares of CMP at broker A (Merrill Edge)
• 7/8/2024 Sell 400 shares of CMP at a loss at broker A (old shares from prior to 2024)
• 8/20/2024 Buy 600 shares of CMP at Broker A
• 9/12/2024 Sell 200 shares of CMP at a loss at Broker B (Schwab) (old shares from prior to 2024)
• 9/23/2024 Sell 200 shares of CMP at a loss at Broker A (old shares from prior to 2024)

From what I see, the sale of 200 shares on 9/12 creates a wash sale with (some of) the lot purchased on 8/20. All the other sales do not.

My understanding is that the loss from the 9/12 sale is disallowed and will increase the cost basis of (some of) the 8/20 lot.

Here are my questions:

1. Is it correct to increase the cost basis of 200 shares from the 8/20 lot, since that is how many I sold on 9/12 (effectively splitting the lot into two lots with different cost basis)?

As least that's my understanding from reading IRS Publication 550, section "More or less stock bought than sold".

Or do I need to "distribute" the loss across all 600 shares, since there is no sequence (as the 600 shares on 8/20 were purchased in one single lot)?

2. Assuming that I can allocate the increased cost basis to only 200 shares: If I were to sell those 200 replacement shares before the end of the year, that should "heal" the wash sale AFAIK, that is allow me to take that loss.

But as a practical matter how to I indicate that I am selling the replacement shares, when selling part of the 8/20 lot at broker A? Broker A doesn't know about my wash sale at broker B, so for them the 600 shares I bought on 8/20 is all one lot with one cost basis.

Or do I need to sell all 600 shares from the 8/20 lot to avoid any ambiguity as to whether I am selling replacement shares or not?

Thank you very much in advance to your help,

Bernhard

P.S.: If you know of any articles on the internet that cover this issue in depth, kindly point me to them.

Answer 1

1. You're correct to just add the disallowed loss to the cost basis of 200 shares, you don't prorate it across the entire lot. Pub 550 says:

Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

2. When you sell those shares, you simply go through the same procedure of determining whether it's a wash sale. As far as taxation is concerned, it's as if you'd bought them at the higher price in the first place. If you sell them at a loss relative to the adjusted cost basis, and you have another purchase within 30 days of the sale, you have another wash sale and have to go through the adjustment process with the shares from that purchase.

I think most brokerages provide a way on their web site for you to change the cost basis of shares in your holdings, including splitting a lot into multiple lots with different cost bases. This is mostly used to enter the cost basis of shares purchased before brokers were required to keep cost basis history, but it can also be used in situations like this. If you can't find it, contact their customer support.

Answer 2

Is it correct to increase the cost basis of 200 shares from the 8/20 lot, since that is how many I sold on 9/12 (effectively splitting the lot into two lots with different cost basis)?

Yes. You match share for share in the order of purchase. Since you only have one lot and its larger, 200 of those need to have a price adjustment.

But as a practical matter how to I indicate that I am selling the replacement shares, when selling part of the 8/20 lot at broker A? Broker A doesn't know about my wash sale at broker B, so for them the 600 shares I bought on 8/20 is all one lot with one cost basis.

You make the adjustment on your tax return, the broker doesn't care. Brokers do track wash sales within their accounts and report them on 1099, but in your case replacement shares are in a different brokerage. You can ask that brokerage to adjust the price for you in their tracking system, ask them about the process. You will still need to adjust the numbers on your tax return when you sell the lot (or make sure the broker reported your adjustments correctly after you import the 1099). You'll need to do that when you sell that 8/20 lot (or, until you sell 200 of shares from it).

Or do I need to sell all 600 shares from the 8/20 lot to avoid any ambiguity as to whether I am selling replacement shares or not?

I don't think making investment decisions based on a bit of extra paperwork is a good idea.