assumes replacement shares are the same as shares sold at a loss
the wash sale period is 30 days before or after the loss sale
so if you sold 100 shares at a $5 loss and only repurchased 20 shares during the wash sale period only the loss on 20 of the 100 sold would be added to those 20 shares or $100 (20 * $5)
if you bought 200 shares during the wash sale period only the first 100 would have their basis adjusted for the $500 loss.
so your no. 2 would be the correct approach
