Question I am trying to make sure I understand the wash sale rule correctly as the examples available always address a loss first with a subsequent purchase.
Under the wash sale rules, if you sell stock for a loss and buy it back within the 30-day period before or after the loss-sale date, the loss cannot be immediately claimed for tax purposes. Instead, the disallowed amount (or loss) is added to the cost basis of the repurchased stock.
This being the case, if I buy 1000 shares of XYZ for $1000 ($1/share) on Jan 10th and on Jan 12th sell all 1000 shares for $1500 ($1.50/share), I would recognize a gain of $500. If I subsequently buy 1000 shares of XYZ for $1200 ($1.20/share) on Jan 20th and sell all 1000 shares on Jan 21st for $900 ($.90/share), I would not be able to recognize the $300 loss. Instead I would have to adjust the cost basis of the shares purchased on Jan. 10th to $1.30/share or $1300 and only reflect a gain of $200.
Now if this is correct, and no other purchases were made within the specified window, do you still have to reflect the wash sale on Sch D - it's basically moot? Turbo tax ignored reporting the wash sale as I no longer had a position.
If you do make a subsequent purchases within the specified window, say on Feb 1st of 2000 shares. Which shares do you adjust the cost basis of, the shares purchased on Jan 10th or Feb 1st?
Thank you.
Answer Ron, this sounds like a tax exam question! Did you really do these purchases? Regardless here's how to look at the wash sale rule...it requires that you obtain "replacement shares" during the 30 days before/after your loss sale. It isn't always clear what that means, but when you do obtain replacement shares, the disallowed loss is added to the basis of those replacement shares.
Think of it in terms of the point of this rule. The IRS doesn't want you to claim a loss if you aren't 'out of the market' for at least 30 days (61 really).
In your hypothetical, the Jan 10-12 transaction has no effect because it's a full disposition. Those cannot be considered replacement shares for a loss sale occurring within the 30 days after 1/10, because as of Jan 12 you owned 0 shares. You're out of the market. Make sense?
You're on to an issue here though...it can get complicated when you have multiple buys and sells within the 61-day window, especially with sales of partial batches - it's possible to have valid loss sales despite making purchases as well. Rather than reinvent the wheel I'll defer to Kaye Thomas's excellent analysis of the topic at http://www.fairmark.com/capgain/wash/index.htm
