Wash sale repetition through chaining

Question

Wash sales seem to have very weird behavior, here's an example. It uses all the same stock, and there are no other holdings besides those mentioned.

Day 1, buy 100 shares for $200 each, so $20,000 total

Day 2, sell 1 share for $7, so a $193 loss

Day 3, sell 99 shares for $201 each, so a $1 gain per share, or $99 gain total

Now to analyze this for wash sales. There is only a single loss sale, the one on day 2. Are there any buys in the surrounding 61 day period? Yes, the day 1 buy. I assume that the sell cannot be washed by the buy of its own share, so I think it must be washed by one of the other 99 shares in that buy.

So transfer the the $193 loss onto one of the other shares, now when that share is sold it isn't a $1 gain, it is a $192 loss. Now analyze this loss for wash sales.

This process keeps repeating, and you end up with 99 wash sales all chained together, and a single non-wash sale ending the chain, with a loss of $94.

Is this right? Can 1 buy and 2 sells lead to 99 wash sales?

Edit: Bob Baerker suggested a to apply a new rule that "a buy cannot wash a sale if that sale is selling shares acquired in that same buy". Applying that rule means the earlier example has no wash sales. But different examples can have essentially the same effect, even with this new rule, here's a new example:

Day 1, buy 50 shares for $200 each, so $10,000 total

Day 2, buy 50 shares for $200 each, so $10,000 total

Day 3, sell 1 share for $7, so a $193 loss (treat this as coming from the day 1 lot)

Day 4, sell 49 shares for $201 each, so a $1 gain per share, or $49 gain total (treat this as coming from the day 1 lot)

Day 5, sell 50 shares for $201 each, so $1 gain per share or $50 gain total (treat this as coming from the day 2 lot)

The day 3 sale is a loss, and for wash sale purposes we ignore the day 1 buy (because of the new rule), and treat it as being washed by 1 share of the day 2 buy. Now transferring the $193 loss to its sale, that means 1 share of the day 5 sale has a $192 loss instead of a $1 gain.

Now analyze this day 5 loss for wash sales. We ignore the day 2 buys (because of the new rule) and see that it gets washed by 1 share of the day 1 buy. So transfer the $192 loss, and one share of the day 4 sell gets a $191 loss instead of a $1 gain.

This keeps repeating and we end up with 99 wash sales all chained together, ending with a single non-wash sale. The single final non-wash sale has a loss of $94. This is essentially the same result as the previous example. We just had to divide the buys and sells in half and alternate back and forth between those in order to never have a buy directly washing a sale of its own shares.

Answer 1

A wash sale occurs when you sell a security at a loss and you buy a “substantially identical” stock, security or option within 30 calendar days before or after this sale. In your example, you only have your original purchase and no additional purchases so there is no wash sale involved here.

Answer 2

From the IRS -

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

When you parse out the wording, you find that if I buy a stock, and sell it within 30 days at a loss, the wording above says I have a wash sale. One can debate (but I won't) whether this makes sense. What I know is that members have reported their broker statement flag such transactions as wash sales.

But, when 31 days pass, and the investor has no shares of the stock in her possession, the transaction is complete, the loss is taken, and the wash sale effect is negated. In your case, I see buys for 100 shares, sales for 100 shares (total), and it's show over, tip your waitress, drive home safely.

Edit - Since only one share was sold at a loss, if any shares are purchased within 30 days after that sale, the loss (-$193) is delayed, and the new single share gets a basis lowered by the amount of that loss.

Final Edit - I see a major edit to the question was just posted. My answer may no longer apply. I don’t plan to re-read the question to figure this out. A high rep member can suggest I delete my answer if it becomes outdated.

Answer 3

Just to add on to Joe's answer...

If you close a position and there's a gain, Uncle Sam wants his cut. If you close a position and there's a loss, there's a 30 day window where Uncle Sam makes sure you didn't just reopen the position, indicating that you only closed the position for the tax loss. As an example , if you buy a substantially similar security within 30 days of your a sale at a loss, you must include your loss on the cost basis of your re-buy, the effect here is to delay your ability realize the tax benefit of the loss.

For the overwhelming majority of people, the only thing you need to consider for wash sales is,

• I bought stock.
• I sold stock and there was a loss.

• Have I bought the stock in the 30 days preceding the sale, did I buy the stock again in the next 30 days, was this a partial sale within 30 days of purchasing the stock originally and I am still holding some of the position?

  • No: book the loss, deduct it against any gains I may have

  • Yes: include the loss in the cost basis of this purchase effectively delaying realization of the loss.

In your second example, the $193 loss on day three, from a sale of a single share of the position taken on day 1 or 2 [practically speaking] it doesn't matter which as both are within 30 days and have the same cost basis anyway [but the rules say you must use FIFO] , would simply be added to the cost basis of one of the shares purchased on day 1 or 2, [but use day 1 because the rules say so but in this situation it makes no difference]. So one of those shares would have a cost basis of $393 ($200 + $193). As for the sales on days 4 and 5, you have a total of 98 shares with a cost basis of $200 per share and 1 share with a cost basis of $393, your position "cost" you $19,993, $19,600 + $393. You have sale proceeds of $19,698 from the 98 shares resulting in a gain of $98 which is taxable immediately and a loss of $192 from the share that absorbed the wash sale loss. If you buy any shares of this stock again (or options or a substantially similar security) in the next 30 days you may have to include that $192 in the cost basis of one of those shares further delaying realization of that loss. If there are no further applicable buys, you have a net realizable loss of $94, $98 gain less the $192 loss.

There's nothing to WIN from wash sales. The wash sale rule is designed to DELAY the realization of losses, thereby potentially increasing your taxable income. You'll find that if you do a lot of trading in short time frames these rules won't actually impact your outcome. It's really designed to stop people from selling for the tax loss when they had no intention of actually closing the position.