Wash Sale Losses

Many tax preparers and taxpayers struggle with wash sale loss rules

Day and swing traders inevitably trigger many wash-sale (WS) loss adjustments amounting to tens or hundreds of thousands of dollars. A WS occurs when you take a loss on a security and repurchase it within 30 days (after or before).

A WS reduces the cost basis on the position sold and adds the loss to the replacement position’s cost basis. That defers the WS loss, creating phantom taxable income and capital gains taxes.

It’s okay to incur WS losses during the year, but try to avoid delaying them to the following year. Deferring a loss from November to December is acceptable; however, postponing a loss from December 2023 to January 2024 is not.

Learn how to “break the WS chain” at year-end. For example, sell your entire position in security A by Dec. 20, 2023, and don’t repurchase it for 30 days, around Jan. 21, 2024. That doesn’t provide a WS bridge from the tax year 2023 to 2024. You may deduct the whole year of WS losses in 2023.

 When you get your broker-issued Form 1099-B showing massive WS loss adjustments, don’t panic. What’s critical is the number of WS open at year-end for which you repurchased positions within 30 days in January 2024. For example, suppose the WS loss adjustments column on the 1099-B is $500,000. If you avoided all WS at year-end by refraining from repurchases in January, the cost basis column should be $500,000 greater than your actual purchase price.

The 1099-B calculates taxable income as follows: Proceeds, minus cost basis, plus WS loss adjustments equals net taxable capital gain or loss.

There’s a quirky WS rule between taxable and IRA accounts. The WS loss becomes permanent if you take a loss in a taxable account and repurchase the security position in an IRA within 30 days. The IRS does not allow you to add the WS loss adjustment to the IRA cost basis. Yet, the IRS requires a reduction of the cost basis in the taxable account. Avoid this problem with a “do not invest list” in the IRAs vs. what you trade and invest in taxable accounts. This WS rule applies to taxable vs. IRA accounts; an IRA account is not subject to WS losses.

For more information, see Green’sTraderTax Guide Chapter 4, Accounting for Trading Gains & Losses.