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MH084
Returning Member

Wash sale - 'backwards' replacement shares

Hi, looking for advice on a wash sale scenario:

The IRS instructions and many sites describe replacement shares being bought within 30 days before or after the wash sale date, but examples always show the simpler 'after' case.

 

I have wash sales where the same security was purchased (and sold for a gain) less than 30 days before. It seems like adding the loss to the cost basis of earlier purchases only makes sense if you're still holding those shares at the time of the wash sale. Otherwise, it seems to violate the intent of the rule - to make you recognize gains immediately but defer losses if you rapidly trade out and back in. You could end up with a reverse chaining effect - turning earlier gains into losses, which seems pretty unlikely to be the intent.

 

Example:

Lot 1: 6/1/20 - Bought 100 shares for $1000, sold them on 6/5 for $1100 ($100 gain)

Lot 2: 6/6/20 - Bought 100 shares for $1100, sold them on 6/20 for $900 ($200 loss)

Lot 3: 6/15/20 - Bought 100 shares for $1200

 

So it seems like after selling Lot 2 you should ignore Lot 1 and apply the $200 loss to cost basis of Lot 3.

But if you still held Lot 1 on 6/20, you would apply the $200 loss to Lot 1.

Can anyone verify the correct way to handle this? Thanks!

4 Replies
fanfare
Level 15

Wash sale - 'backwards' replacement shares

IRS says to adjust the earliest identical shares.

 

Lot 2 is a wash sale because of Lot 3.

Basis of Lot 1 is adjusted .

 

Your broker will assign the lot to be adjusted. Sometimes their rule is hard to understand.

 

The term is identical shares, not replacement shares.

fanfare
Level 15

Wash sale - 'backwards' replacement shares

I edited my reply above.

MH084
Returning Member

Wash sale - 'backwards' replacement shares

Thank you. 2 things-

 

1) When Lot 1 is adjusted by $200 (goes from $100 gain to $100 loss), it should also become a wash sale, right, and that $100 would adjust Lot 3?

 

2) But if you had another, earlier Lot 0 - same # of shares bought and sold on 5/15/20 for $50 gain- would Lot 1 become a wash sale and apply $100 to Lot 0 (now $50 loss).  In this case, I presume the chain would end there because Lot 3's purchase date is more than 30 days after Lot 0's sale date.

 

fanfare
Level 15

Wash sale - 'backwards' replacement shares

In the old days, wash sales would mostly appear in December.

The point of the Wash Sale rule is to prevent taking a  loss for tax purposes this year even though you didn't take a loss because you bought the identical shares back.

 

If you're going to close out all your positions by end of year, does it matter which shares are adjusted? No it doesn't.

it's an issue only because IRS wants transactions with adjustments to be itemized. But the net effect is zero.

 

Nowadays, you can let the broker worry about this and do the reporting for you.

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