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I'm wondering if a wash sale would ever be beneficial to someone. My theoretical scenario is that someone is not making much this year, and so they day trade and go in and out of stock, making both gains and losses on the sales of that single stock. This will mean that for the losses, they will be considered wash sales. That person day trades this single stock, accruing more wash sales periodically until the next year when they finally sell all their shares for good. If that person is making more in salary that second year, does writing off these wash sales a year later actually benefit them more than had they avoided wash sales and written the losses off the first year?

Basically, if I have a bunch of wash sale losses that I miss out claiming during a low income year, do I actually benefit by carry those loses over into the next tax year if I expect to make higher income?

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If I understand the strategy you are describing correctly, yes, you are in a better position with this strategy than had you just sold the stocks in your low income year to write off the loss that year, assuming your marginal tax rate is higher in the later high income year.

However an easier strategy with the same benefit is to just sell the stocks, pay capital gains tax, and rebuy the next day in the low income year. No reason to mess around with wash sales, those just keep your cost basis at whatever it was before the wash sale. If this strategy is not an option you should just hold the stock and not sell, or try to play any wash sale games since those get you nowhere (that is kind of the point).

  • I don't think that your scenario address the OP's premise. He doesn't have a position to sell that has appreciated over a period of time and, he's not generating a loss for the next year unless the stock tanks after repurchasing it. If my take is right, he's looking to generate an offsetting gain, give or take, where he can book the gain on 12/31 and book the loss on 1/02. That would involve non "substantially identical" securities. – Bob Baerker Feb 6 '18 at 4:23
  • @BobBaerker You very well may be right. The question is a bit unclear and I strongly suspect the short answer is "that doesn't help" – Matt Feb 6 '18 at 4:25
  • Yep, question not clear enough to discern his thought process. However, the gain/loss scenario can be achieved with some finesses (see my comment under the other reply). – Bob Baerker Feb 6 '18 at 4:34
  • @Matt, You're first paragraph addresses what I'm asking. I'll try to edit and add a summarised sentence in my original description to clear things up. I'm having trouble explaining my thoughts perfectly. – mrplow911 Feb 6 '18 at 11:19
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Yes. I sell a stock for a loss in November. I realize, in 25 days, that my loss will offset a long term gain, which would otherwise avoid tax as I am in the 15% bracket. I buy the stock back, and have a wash sale. I sell in January and claim the loss in the next year, again ordinary income (up to $3000) and while in the 25% bracket.

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I'm not sure if we're on the same page with "day trade a stock making gains and creating wash sales". In order for that to make sense, you'd need two legs, either a stock and its option(s) or a pairs strategy (two unrelated securities, one long, one short). After price movement in one direction, you'd book the leg with a gain, paying taxes on it this year and carrying the loss forward into the next year, benefiting from the loss in the subsequent year.

There are a number of complex tax regulations which you must not run afoul of. The "substantially similar" rule would be one. As an example of attempting the reverse of your scenario, prior to 1997 you could "short against the box" in order to delay a taxable event.

AFAIC, this approach would only make sense late in the year when you could book the gain on 12/31 and take the loss on 1/02. Too much can happen if you close one leg now and there's 10+ months until you can close the other leg.

My guess is that the IRS will not have an issue if you are paying taxes sooner (this year) rather than later (next year).

Take this reply with a grain of salt (g). Verify the tax consequences before executing.

  • Sorry, my original post was a bit confusing. By "day trade a stock making gains and creating wash sales", I mean that I would be going in and out of the same stock intraday, with both gains and losses on that single stock. – mrplow911 Feb 6 '18 at 1:14
  • You can't create separate taxable and deductible gains and losses by going in and out of the same stock intraday, within the same year. You add them all up and you have either a net gain or a net loss. It makes no sense to create losses without the gains. – Bob Baerker Feb 6 '18 at 4:18
  • Here's a possible scenario. Find a pair of stocks in the same sector that are highly correlated and have diverged toward their extreme spread difference. In November or early December, buy the undervalued one and sell the overvalued one (as per the spread). If they behave, they converge and you have a net profit. That's gravy. What you want is for both to go up or down "X" pct. Say up. Sell the winner on 12/31 and cover the loser on 1/02. Gain booked for this year, deduction for the following year. Make sure borrow costs are low and the short stock has no dividend in the time frame. – Bob Baerker Feb 6 '18 at 4:30
  • Thanks @Bob. This is a good concept. I tried to improve the clarity of my question. – mrplow911 Feb 6 '18 at 11:22
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Note that the IRS has rules prohibiting short term wash sales: Source. You would have to have at least 30 days between the sell and a rebuy of the same stock in order to claim a loss, so "day trading" is not really applicable.

That said, in the absolute very best case you get to lock in a loss now at the cost of paying larger capital gains later (in the case where the asset goes back up in price). Other scenarios involve you simply holding on to a losing asset.

Finally, trying to apply wash sale losses to the same year where you sell the stock for good is equivalent to having done nothing. You would only see the benefit of a loss now vs higher capital gains later if you applied the losses to a year prior to selling the stock for good.

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    The IRS rules apply to the deduction of wash sale losses rather than prohibiting them. It doesn't matter whether you are an investor or a "day trader". A wash sale is a wash sale.For those who trade significantly (size and frequency), they can apply to the IRS for "Professional Status". If approved, you are then allowed to do MTM accounting (on a yearly basis from 12/31 to 12/31) and the wash sale is not applicable. – Bob Baerker Feb 8 '18 at 12:13

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