How does the wash sale rule work in this situation?

Question

I knew how wash sale work in simple example. But how about in this example:

I lost $1000 for selling Share X. Within 30 days, I purchase it again, this time I gain $500 for selling it.

Again, within 30 days after I sold the second time, I purchase it again, this time I lost $1000 again for selling it.

If from now on I stopped to purchase this stock, I had no problem to calculate, but I decide to purchase it again within the 30 days from previous transaction, and this time I decide to hold it for a long long term.

I knew wash sale won't apply to stock gain, so in my situation, I had gain $500 between, but lost $2000 total, the net lost is $1500. When it came to tax for the wash sale, will IRS tax me for the $500 gain at the end of the year while i am still holding this stock? If IRS did, it sounds very unfair to me, since I had lost $1500.

Answer 1

The way the wash sale works is your loss is added to your cost basis of the buy. So suppose your original cost basis is $10,000. You then sell the stock for $9,000 which accounts for your $1,000 loss. You then buy the stock again, say for $8,500, and sell it for $9,000. Since your loss of $1,000 is added to your cost basis, you actually still have a net loss of $500. You then buy the stock again for say $10,500, then sell it for $9,500. Your $500 loss is added to your cost basis, and you have a net loss of $1,500. Since you never had a net gain, you will not owe any tax for these transactions.