why was there a wash sale when I never placed a trade?

[jade70]

On my 1099-B, a wash sale was listed. It's from an investment portfolio originally within an advisory program. However, I changed to self-directed. Then, I just left it as it is without making any trades on my own. I just don't understand why something in the portfolio (mutual funds) would become a wash sale if I never made the trading at first place??? The only thing I have accumulated is the interest and/or dividend. Would someone explain this to me, please? Thanks

[DianeW777 · Accepted solution]

Yes, if the investment portfolio was trading on your behalf then a wash sale could occur. The wash sale rules are posted for you to help understand how it works. It can be difficult to track if this is your situation but the plan administrator should always mark these for you if the funds remain with the same company.

Wash sales cannot be combined into section totals.  They should be entered individually so that you can track your cost basis and know when you are allowed to use the information on a final sale.

Wash Sale Rule Defined:

• A wash sale occurs when an investor sells or trades a security at a loss, and within 30 days before or after, buys another one that is substantially similar.
• It also happens if the individual sells the security at a loss, and their spouse or a company they control buys a substantially similar security within 30 days.
• The wash-sale rule prevents taxpayers from deducting a capital loss on the sale against the capital gain of other stock.

Affect on Cost Basis:

• The loss that occurs on a wash sale is added to the cost basis of the shares purchased that created the wash sale.
• When all shares are sold and there is no repurchase, that increased cost basis will be used in full and used to determine gain or loss.

As long as you are tracking the wash sales and are not using them on the tax return when you are not allowed, then you can simply enter the same cost basis as the selling price. This will  reconcile your tax return with your Form 1099-B Proceeds which is what the IRS is comparing.

Wash Sale ends:

The wash sale disallowed is not added to the net gain/loss rather it is adjusted and suspended so that it does not affect the total gain or loss for any pending wash sales.  The rub is that the broker only knows when a wash sale occurs, not when a wash sale no longer exists. This can spill over between two tax years.  Likewise you can have a wash sale during a tax year, and then fully dispose of the stock in the same year which would eliminate the wash sale rule for the final sale of the same stock. 

It's up to you to know when you no longer have to consider the wash sale rule. 

Example: 

X bought 5 shares of ZZZ stock, at $5 per share, then sold it for $3 per share, however immediately before the original 3 shares were sold, X bought another 5 shares at $5.00 per share.  

     $25 for the first block of shares

       15 is the proceeds creating a $10 loss 

The $10 loss is now added to the cost of the new shares for an overall cost basis of $35.  

Once the second block of shares is sold (5 shares with cost basis of $30) without any repurchase with in the 60 day window (30 days before or 30 days after the sale), and if they are sold at a loss, then no wash sale exists on the sale, and a loss is allowed.

[jade70]

Thank you very much for your reply Diane.  I understand the concept of a wash sale, yet I just don't understand why my portfolio without any administrator ( I thought I just let it sit for a long term investment and the broker just as custodian), would trade on its own???  I'm so confused!!!! 😣

[fanfare · Accepted solution]

Say some but not all of your shares in the fund were SOLD in  February.

The fund distributed captial gains or dividends in March that were reinvested (not uncommon).

Those reinvested BUYs trigger a Wash Sale on up to that number of your SOLD shares.

This can also happen in December.

What are the dates on the transaction detail for the shares marked "W" (wash sale) ??

If your fund distributes gains or dividends on or about those dates, that's what happened.

@jade70 

[jade70]

Thank you fanfare for explaining, and I totally understand what you said.  However, I still don't understand, for example in my case:

1.  This stock has always been managed by myself, the only trade I did was buying it on 12/17/2021.  The following is shown for my current tax lot information.  My year 2023 also showed wash sale for this particular stock.  Then, the most updated one is TODAY.  the wash sale word popped right next to the ticker today, yet it's not showing on the tax lot information (yet??).  I just don't understand that I never sold it, and it only accrues dividend, and that's all I have gotten.  No re-investment for the dividend at all, for this security doesn't allow the holders to have dividend reinvestment.

2. The mutual funds account I mentioned from my previous replies/posts is called iShare.  I have never had this iShare for dividend reinvestment either.  the wash sale word popped a week ago, but now the word is gone.   

So.....  without reinvesting, without me perform the exception for trading, why is it categorized as wash sales???  PLEASE explain, and how do I recover and make wash sale go away?  it seems like it may happen again.  Thank you so much

[fanfare]

if you got a 1099-R for 2024 showing transactions you did not enter, someone else has access to your account,

or you need a corrected tax document.

if your transaction record is wobbling you should ask the broker why.

@jade70 

[jade70]

Thank you fanfare.  Indeed, my broker did the investigation, finding that I have never made any trades on my own.  However, somehow the cooporation made some changes for the  cost basis.

Thanks again to point out and remind me to contact the broker....