No this does not turn into a $1000 loss. This is because your cost basis has increased your shares of your new stock by $500. This would mean if you sold your stocks long-termed or short-termed later, your capital gains will be $500 less because of the added basis.
Similarly, if you have a capital loss, the loss would increase $500 because of the added basis. Either way, this is a tax benefit to you and this is why the IRS will not allow wash sale losses because it will not allow you to declare a loss while experiencing the benefit of increased basis to your new stock.
Please read Publication 550 under the section entitled wash sales. It states;
You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.
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:
- Buy substantially identical stock or securities,
- Acquire substantially identical stock or securities in a fully taxable trade,
- Acquire a contract or option to buy substantially identical stock or securities, or
- Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
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