Wash Sale treatment for completely exited positions

[rf_ee]

Last year when my brokerage information was imported to TurboTax there was a significant amount reported as wash sales. It appeared that TurboTax used the gains reported on the 1099B and then subtracted the losses reported on the 1099B and then added the wash sales. This caused TurboTax to report gains and taxes owed.

When I look at the current gains and losses of my portfolio on my brokerage firm's site, it shows that I have a disallowed loss for some positions this year.

My question is how do I avoid TurboTax reporting that I have gains for disallowed loss this tax year? Will the following strategy work?

1) Completely exit positions that show disallowed loss. At the end of this year, the brokerage account will have no positions that had disallowed loss. My thought is that the 1099B will still show disallowed loss for these positions.

2) Wait to sell puts to buy positions in a separate IRA brokerage account after 30 days.

3) What I expect to happen is that when I import the brokerage info into turbo tax, is that turbo tax will attempt to add in the "disallowed loss" from the exited positions. Since I do not own any of those positions, I will remove that amount from the gain-loss calculation and will not "owe" taxes on a disallowed loss.

Does this sound like a reasonable strategy? Any other suggestions? Anything that I should be aware of?

[NCperson]

@rf_ee - I suspect you are overthinking it.  If you just ensure that Turbo Tax MATCHES the 1099-B from the broker it will all work out.   

And you may have done something wrong in Turbo Tax if you played with the wash sales; how was there a gain?????? can you provide the specific numbers? 

it's just the loss that is disallowed, but it should not cause a loss to become a gain.  Please review how the 1099-B is reported and what you reported to the IRS in Turbo Tax.  You may be misinterpreting what occurred. 

Let me provide an example as a way of explaining.

• On June 10,  2023, you purchased 100 shares of ABC stock for $10 per share. (cost basis $1000)
• On August 10, 2023, you purchased an addition 100 shares of ABC stock for $5 per share.  (cost basis $500)
• On August 15, 2023, you sold 40 shares at $4 per share.  (sales price $160, cost basis $400 from the June 10 lot). There is a 'wash sale since you sold at a loss and purchased the same stock within 30 days on either side of the loss sale. No gain and no loss is able to be reported on the tax return.  The loss is added to the cost basis of an existing lot. 

your current cost basis would be: 

• The June 10, 2023 has the 60 remaining shares at a cost basis of the original $10 per share or $600 PLUS the disallowed wash sale of $240, so $840 in total). 
• The August 10, 2023 lot still has 100 shares with a cost basis of $500)

On August 16, you sell out the entire position at $3 per share and do not buy the stock back again any earlier than September 17!

Sold 160 shares at $3 per share.  $480

Cost basis: $840+500 or $1340

Loss reported on tax return: $860

So let's reconcile that:

• there were two purchases totaling $1500
• there were two sales ($160 + $480) totaling $640
• total loss of investments: $860!!!!! it matches the loss reported on the tax return. 

 does that make sense.  Again, it's not as complicated as I think you are suggesting.  Your strategy should be to ensure that what is in Turbo Tax matches what is on the 1099-B. The strategy is as simple as that!

[fanfare]

Assuming you are acting in one trading account, If you close all positions in a "wash sale"-involved  security, you have no triggering buys that are carrying the "disallowed loss".  It all cancels out. The broker is required to track all this for you.

None of this relieves you of your responsibility to provide details of wash sales on Form 8949 as required by IRS instructions on this matter..

@rf_ee 

[rf_ee]

Hi thank you for the explanation. I understand the wash sale to work as you describe. For some reason last year, Turbo tax added up the capital gains, subtracted the capital losses and then added in the disallowed losses.

It sounds like you agree with me that if I exit all the positions then all I need to do is add up the sells and subtract what I bought them at to determine the capital gain (or loss). This way I can disregard whatever turbo tax does to disallowed loss.

The only thing I am adding to the mix is that I will repurchase the shares in my nontaxable account >30 days after the sale.

The nontaxable account will allow me to buy and sell without concern for the wash sale rules.

[mgarry3416]

After reading the various posts I think you are trying to do too much.  Its one thing to track your positions using software.  When it comes to reporting for income taxes use the tax forms provided by your brokerage account.  

If you look at my profile you will see I'm a retired IRS Revenue Agent.  My job was to audit tax returns.  One of the things we would review during an exam is if there was a wash on a loss.  Remember the IRS and your state tax authority gets copies of all information returns.  We will check those information returns to the return.  Its when there is a difference then we ask questions to explain.  Long story short is to use the tax forms provided by your brokerage account to prepare your return.  If the brokerage account is wrong contact then and work it out to get a corrected tax form.  

As for taxable and non taxable accounts a friend gave me some advise on how to treat the two accounts.  Think of two buckets.  One is vinegar and one is oil.  The two do not mix.   

[NCperson]

@rf_ee actually, I am not agreeing with you.  If Turbo Tax does not match with the 1099-B from last year, you need to AMEND last years tax return!!! you can't just fix any issues by adjusting this year's tax return.  

You have not provided enough detail for me to understand whether turbo tax didn't match the 1099-B or whether you misunderstand what occurred. 

As turbo tax is a 'do it yourself' software, if for whatever reason the download of the 1099-B data from your broker to turbo tax didn't occur correctly, it is your responsibility to ensure it is corrected; you can't just say 'well, that is the way turbo tax did it'.

[rf_ee]

Four (4) 1099B were sent to me for this same brokerage account. It was ETrade and they were acquired by Morgan Stanley so they had two different systems. The last two 1099B's were corrected and the last one was sent in June.

In April when I filed my taxes and I used TurboTax to download the info from the brokerage, there must have been some cost basis that was not coming across correctly. Because of the download issue, I ended up entering the 1099B numbers by hand and then sent the 1099B forms that I had at the time to the IRS.

With this new 1099B from June, I have entered the numbers by hand. I still have to send this new 1099B to the IRS.

My question was for this year. I want to make things as simple as possible. I would like to be able to use the download feature in TurboTax. If on an exited position to calculate the capital gain tax we use the sell price minus the cost basis of the stock then we agree. Do you agree that I must wait 30 days to repurchase the stock in any account to avoid wash sale disallowed losses?

[fanfare]

use the numbers shown on your 2024 1099-B. The broker is required to do the adjustments for you.

@rf_ee 

[fanfare]

If you wait thirty days, but start trading that security again, the wash-sale rules will continue to be applicable.

@rf_ee 

[NCperson]

@rf_ee but if you wait 31 days, the wash-sale rules don't apply........

[fanfare]

that's not what I meant,

but, whatever ...

[rf_ee]

Thank you

[rf_ee]

These rules are complicated and it helps me to hear the discussion. Thanks again!

[rf_ee]

Hi

Since the brokerage sent me a corrected 1099B I have to send the IRS an amended return and the new hardcopies of the 1099B. May I efile an amended return and then send the hardcopy 1099B in snail mail? If so how do I efile an amended return through TurboTax?

Thank you

[mgarry3416]

Why are you sending hard copies of your F1099B?  There is no requirement to send these forms.  The IRS gets copies of thesis forms from your broker.    

You may want to see if there is a difference in the tax due.  If its only a few dollars,  I would wait until the IRS sends you a notice.  Or if you are due a refund, decide if its worth your time to file the amended return. 

Also, when filing an amended return, wait until your first return is posted.  You can check on line at the IRS website under  "Get your tax records and transcripts."  If your due a refund on your original return, you return is posted when you receive the refund check.