Wash sale losses disallowed

I did a lot of trading in 2011 with just a few ETFs and hence incurred the "wash sale" problem.  My real profit was about $2500, but Schwab has reported a net gain of about $9000, because many of the wash sale losses were disallowed.  All my shares were bought and sold--i.e. I don't hold any shares currently.  Does anyone know how I can avoid paying tax on 'profits' I didn't have???  This must be crucial for "traders".  Can this be handled in Turbotax?  I also read about a product called Tradelog.  Anyone have any experience with this?


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It sounds to me like you are not entering the cost basis of the shares that, when purchased, caused the original wash sale.  You need to go through each sale of "replacement shares" and fix this.  

Let's do a simple example:

Buy 100 shares of Company A for $10/share, sell 100 shares of Company A for $9/share.  
Buy 100 shares of Company A for $12/share in the wash sale window, sell 100 share of Company A for $15/share.

I'd guess Schwab's 1099-B reads

Transaction 1 : Proceeds $900 Cost $1,000 Box 5 $100
Transaction 2:  Proceeds $1,500 Cost $1,200 Box 5 $0

If you ignore the fact that the $100 wash sale loss gets ADDED to the replacement share's basis you'd report:

Transaction 1 Gain/loss $0    (loss deferred)
Transaction 2 Gain/loss $300
Total $300

If you properly tell Turbo Tax that the second lot of Company A was "purchased in a wash sale window" (that's one of the choices under the "how were these shares acquired page" then Turbo Tax asks for the amount of deferred wash sale loss that needs to be added to the purchase price of this lot, changing its basis in this case from  $1,200 to $1,300.

Now when you enter these transactions in Turbo Tax you' report

Transaction 1 Gain/loss $0  
Transaction 2 Gain/loss $200
Total $200

You might easily have had a succession of wash sales in the same security (sell at a loss, buy replacement shares, sell at a loss, buy replacement shares, sell at a loss, buy replacement shares) and, in theory, you'd have to work through each successive sale of replacement shares adding the increasing amount of deferred loss to each lot.  If, however, there were no replacement shares at year end (and no subsequent purchases within the wash sale window) you could safely roll all the deferred loss into that final sale of shares.  Your "proof" that you did it right is that the total gain/loss on these transactions equals your real gain/loss on these transactions.

If you're going to be a trader you need a good understanding of the wash sale loss rules and that includes the determination of HOW MUCH loss gets deferred.  In the above example 100% of the loss was deferred, but that's not always the case.  The amount of loss that gets deferred is in proportion to the number of replacement shares purchased to the number of wash sale loss shares that were sold.

Tom Young
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