Wash Sale Rule and December Wash Sales

[DB2022]

Hypothetical:

You purchase 100 shares of stock XYZ on December 15, 2021 for $10/share ($1,000). You sell the 100 shares of stock XYZ the same day, December 15, 2021 for $9/share ($900), taking a loss of $100.

On December 16, 2021, you again purchase 100 shares of stock XYZ for $7/share ($700) and sell all 100 shares the same day, December 16, 2021, for $1/share ($100), taking a loss of $600.

My understanding is that you violated the wash sale rule the moment you purchased 100 shares of stock XYZ on December 16, 2021 at $7/share. My understanding is also that your cost basis on the December 16, 2021 shares is $8 (the December 16, 2021 purchase price of $7/share + the $1/share you lost on December 15, 2021).

Two questions:

(1) When I sell the 100 shares of stock XYZ on December 16, 2021, is my realized loss $700 ($100 lost on December 15, 2021 + $600 lost on the December 16, 2021 purchase and sale)?

2) If I wait 40 days from December 16, 2021 to buy the stock again and avoid the wash sale rule, can I write off my losses from the December 2021 trade on my 2021 tax return? Or will those losses be held in suspense until I can no longer violate the wash sale rule again and roll over to the 2022 tax year?

[JulieS]

When you have a wash sale, your loss is suspended, but immediately the loss is added to the basis in the replacement stock.

You purchase 100 shares of stock XYZ on December 15, 2021 for $10/share ($1,000). You sell the 100 shares of stock XYZ the same day, December 15, 2021 for $9/share ($900), taking a loss of $100. This loss is suspended and the $100 is added to the basis of the new stock.

On December 16, 2021, you again purchase 100 shares of stock XYZ for $7/share ($700), but the basis is now $800, and sell all 100 shares the same day, December 16, 2021, for $1/share ($100), taking a loss of $700. 

1) When I sell the 100 shares of stock XYZ on December 16, 2021, is my realized loss $700 ($100 lost on December 15, 2021 + $600 lost on the December 16, 2021 purchase and sale)? Yes

2) If I wait 40 days from December 16, 2021 to buy the stock again and avoid the wash sale rule, can I write off my losses from the December 2021 trade on my 2021 tax return? Yes

[DB2022]

Thank you, Julie. Just to confirm, it sounds like the losses on the final trade in a chain of wash sale trades will never be held in suspense. In other words, they are immediately realized as losses for tax purposes. Where you run into an issue is when you make another purchase within 30 days.

Also just to confirm, it doesn't matter if the last day for you to avoid a wash sale is in a different tax year because again, once you are done making the trades that are subject to the wash sale rule, those losses are immediately realized.

[JulieS]

Yes, that is correct.