Need help with entering wash sale

[heiber]

I have multiple wash sale transactions.  My broker updated the cost basis on the subsequent buy to offset the loss.  So in Turbotax, should I uncheck the "Loss from this sale is disallowed due to wash sale rules"?  Since the loss was factored into the cost basis of the new shares shouldn't I get the loss now?  Thanks.

[DaveF1006]

No you would not be able to declare the loss because the loss was factored into cost basis of the new shares. The IRS will not allow you to declare a loss under its wash sales rules. Leave that box checked. 

[heiber]

I am sorry but can you please explain?

If I sold shares at a $500 loss and then purchased 500 new shares at $10 and the broker changed the cost basis due to the wash sale to $11, why can't I take the loss?  If that is the case doesn't that $500 loss turn into $1000 loss?  Please help me with this math.

[Mike9241]

the loss is disallowed and added to the tax basis of the purchase that caused the wash sale. so you get the loss when you sell those shares provided they are not sold at a loss and within the wash sale period, you do not purchase other shares that trigger another wash sale rule.  

if you took the loss on the original wash sale shares and then you get that loss again when you sell the shares that caused the wash sale because the original loss has been added to their basis you would be taking the same loss twice. 

[DaveF1006]

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:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Acquire a contract or option to buy substantially identical stock or securities, or
4. Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.

[heiber]

Ugh.  Math is hard.  Thank you for explaining.

Somehow in my head I got how the values changed mixed up.  This makes perfect sense.