Capital gains/taxes/wash sales:
We only pay taxes on final NET capital gains ADJUSTED for prior year net capital loss carry overs (which are subtracted).
Capital gains – capital losses (ie capital losses offset capital gains) = net capital gains/losses
To calculate this, do the following:
Short term capital gains – long term capital losses = net short term capital gain/loss
Long term capital gains – long term capital losses = net long term capital gain/loss
Net capital losses (short or long), if any, can be used to offset net capital gains (short or long), if any, thus resulting in final net capital gain or loss (short or long).
If a final net capital loss occurs in a given tax year – you may use $3000 as a tax deduction for your personal income, but the rest (if there is more) gets carried forward to the next tax years return, (and the next) where it can be used to offset new net capital gains. This goes on year to year until it gets “used up”.
Capital gains from this year – capital losses from prior years = taxable capital gains* (upon which to pay tax) / losses (to be carried forward)
Capital losses cannot be carried backward to prior tax years for personal income tax returns (but businesses can)
If you have a final net capital gain* you will pay capital gains tax on that gain according to these schedules and whether you have a final net short or long term capital gain:
In addition, a 3.8% NET INVESTMENT TAX (NIT) is levied on your net investment income depending on your income:
https://thecollegeinvestor.com/23577/capital-gains-tax-brackets/
Final short term capital gains are taxed at your marginal tax rate:
https://thecollegeinvestor.com/23577/capital-gains-tax-brackets/
Final Long term capital gains are taxed as follows:
https://thecollegeinvestor.com/23577/capital-gains-tax-brackets/
The effect for highest income earners is:
Short term capital gains: taxed at 40.8%
Long term capital gains: taxed at 23.8%
Capital losses will be 23.8-40.8% less IF you can create a capital gain to match it.
“Wash sales” are almost inevitable if you make frequent trades (eg. day trading). A wash sale occurs when you make a trade in which you sell at a loss AND have bought the same security 30 days before the day of the wash sale OR have bought the same security 30 days after the wash sale. Therefore there is a 61 day window for wash sales (not 60 days). If this should occur, the wash sale loss is disallowed, TEMPORARILY. To calculate/report the wash sale: 1. "WS" is noted on the wash sale trade; 2. the loss IS reported in the PROCEEDS column in the gains & losses tab; 3. BUT the loss is recorded as ZERO IN YOUR “GAIN $” column (because it was disallowed as a loss).
Because the wash sale is a "deferred loss" (temporarily) "RS" for “replacement shares” are then noted on the specific trade 30 days before or 30 days after the "WS" sale to mark the trade that triggered the wash sale. This "RS" trade's cost basis is then "adjusted" by adding the wash sale loss (which was previously recorded as zero) to the RS cost basis. In addition, the cost of the transaction (i.e. commission) is added. The result is the “Total Cost”. The net effect of this that the loss is kicked down the road and accounted for. The adjusted cost basis, which is now higher, will lower your taxable gains, or increases your taxable losses BUT ONLY AFTER YOU SELL THE REPLACEMENT SHARES and consequently close out the wash sale. In this way the original disallowed wash sale loss is accounted for later. However, the wash sale rules continue to apply, so if you sell the replacement shares and have bought the same security within 30 days prior or 30days after you sell the replacement shares, you will trigger a new wash sale. This will go on ad infinitum until you close out the replacement shares and do not buy the same security for 30 days. Only at that time do you start fresh, and all your deferred losses are accounted for. This is all fine, provided you do this (close out) in the same tax year. If you have unresolved deferred losses at the end of the year you will have lost the potential tax advantage (i.e. offsetting gains) for that tax year and you will be paying tax on gains that could have been offset or neutralized with the deferred loss. So, if you have wash sales with corresponding replacement shares marked RS that you are still holding, it is important that you sell those “RS” shares by December 31 and not buy back the same security within 30 days after in the new year. If you forget, and or do so, you will trigger a wash sale back in December and you will lose that offsetting loss. Also note that you will trigger a wash sale if you make sales/purchases across different brokerage accounts/across spousal accounts/and retirement accounts. If you trigger a wash sale by buying replacement shares in a different retirement account you will lose the tax advantage of the loss because the basis adjustment (which definitively would have accounted for the wash sale loss, described above) is not allowed in tax advantaged accounts.
Of note, if you calculated your NET proceeds (which is = “proceeds” – “total cost”) it will appear less than it actually is (“net proceeds” can be calculated at the bottom of the gains & losses tab totals) because the proceeds include the disallowed wash sale loss AND the total cost has accounted for the wash sale loss with an adjusted cost basis of the replacement shares, “RS” (See below). In effect calculating a “net proceed” accounts for the wash sale twice (in the adjusted cost basis (in the total cost) in the replacement shares, and by recording them in the proceeds column. For this reason, the actual “gains $” are equal to “proceeds (adjusted basis to account for wash sale loss)” – “total cost (which also includes wash sale losses)” – “deferred loss”(wash sale loss).
