First let's make sure I understand a Wash Sale:

Let's say I invest in 100 shares of ABC stock for $100 and after a week sell the 100 shares of ABC for $70, I've lost $30 which I can deduct from my taxable income come tax time. However, if I reinvest into ABC for ANY amount within 30 days of exiting ABC for a loss there is a wash sale which means I can no longer claim the original $30 loss as a loss.

Considering that is all correct, here is my theoretical scenario:

Let's say I buy 100 shares of ABC at $1 a share and at the end of the day I sell all 100 shares of ABC at $0.70 (30% loss). On the following day I buy 100 shares of ABC at $0.70 a share and sell at the end of the day when ABC is at $1 a share (30% gain). Let's theorize that this loss / gain cycle repeats consecutively for 8 additional days so at the end I have the following:

  • Lost $30 dollars every other day starting with day 1 and felt -$150 over the 10 day span.
  • Gained $30 dollars every other day starting with day 2 and felt +$150 over the 10 day span.

Per wash sale rules I cannot claim ANY wash sale loss because on the last day I invested in ABC and made a profit.

Knowing I cannot claim any losses, my question is: Do I have to pay taxes on all of the gains? That is, will I still have to pay taxes on $150 dollars even though I only ended up gaining a net total of $0 from the time I started?

Here is a visual example of my scenario:

Day:      | 1    2    3    4    5    6    7    8    9    10
Loss:     | -$30      -$30      -$30      -$30      -$30   
Gain:     |      +$30      +$30      +$30      +$30      +$30 
Felt Loss | -$30      -$60      -$90      -$120     -$150
Felt Gain |      +$30      +$60      +$90      +$120     +$150
Net Gain  | -$30 $0   -$30 $0   -$30 $0   -$30 $0   -$30 $0   
  • At the end of the the 10 days have you sold all of your shares of ABC? – stannius Oct 15 '15 at 19:59
  • 1
    Possible duplicate of Wash Sales and Day Trading – stannius Oct 15 '15 at 20:07
  • @stannius Yes. After day ten I would own no stock in ABC and would have exited with a net gain of 0. – Jacksonkr Oct 16 '15 at 17:12

Disallowed losses due to the wash sale rule are added to the basis of the repurchased shares.

In your example, on day two you paid $0.70 per share. Then the disallowed $0.30 loss from the previous day gets added to the basis, making your total basis $1.00 per share. When you sell at the end of the day for $1.00 per share, your net gain/loss is zero.

Furthermore, you can recapture disallowed losses by selling the last lot of ABC, completely divesting yourself of all holdings in ABC for at least 31 days. Even if that last lot was a loss, when taking into account the increased basis from previously disallowed wash sale losses, you can claim the loss fully on this last, non-wash sale.

  • So I can use disallowed losses to make sure I pay no taxes on the money I made with ABC considering I had a net gain of $0? (the money "made" was taking my from a deficit back to $0) – Jacksonkr Oct 16 '15 at 17:15
  • @Jackson yes, exactly. – stannius Oct 16 '15 at 18:01

Once you own no shares for 31 days, it's game over. Even though the accounting has wash sales to consider, in the end, gains and losses all cancel to one net position of break even, gain or loss. It's when there are shares remaining at the end of a period of time that the wash sale rules really impact the numbers.

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