Wash Sales
The Wash-Sale rule was created by the IRS to disallow the loss deduction from the sale of securities if repurchased by a seller or spouse within the Wash-Sale period. The Wash-Sale period is defined as 30 days before and 30 days after the sale date, totaling 61 days (including the sale date). Learn more about wash sales including rules, what is considered substantially identical, and examples.
When you have a Wash-Sale:
- you are not allowed to claim the loss deduction
- an adjustment must be made by adding the loss to the cost basis of security repurchased
- the holding period of repurchased securities includes that of securities you sold
For example, you have 500 loss-generating shares of Fiko Steel, Co. that you bought at $40/share and you want to sell at $25/share to take a loss for the deduction. About 15 days after the sale, you hear some good news about Fiko Steel, Co. and buy back 500 shares at $30. Even though you experienced a loss of $15 per share, you are not allowed to claim the loss since it was repurchased within the Wash-Sale period. In addition, since you have a Wash-Sale, you have to adjust the cost basis of the new purchase by adding $15/share, resulting in a cost basis of $45/share.
The Wash-Sale rule applies only if you purchase "substantially identical" securities. Here are some examples of securities that are not considered substantially identical:
- Bonds issued by one institution, but with different maturity dates and different interest rates
- Common stock and preferred stock of the same company
- Stocks of different companies even if they are in the same industry
What is wash sale and what are its components?
- The wash sale rule only applies to transactions for the exact same security (CUSIP #).
- A transaction to sell or buy-to-cover is identified as a wash sale if the replacement shares are bought or sold short within 30 days before or after the sell or buy-to-cover. The wash sale rule means a loss is added to the basis of the replacement shares.
- Replacement shares are created by the buy or short-sell transaction that occurs within 30 days before or 30 days after a sell or buy-to-cover transaction that had resulted in a realized loss.
- Disallowed loss is the amount of the realized loss from the sell or buy-to-cover that is applied to the replacement buy or short-sell transaction.
- The basis adjustment is important as it preserves the benefit of the disallowed wash sale loss. You'll receive that benefit on a future sell of the replacement stock.
- The sale of replacement shares can result in a wash sale. The same window of 30 days before and 30 days after applies to the replacement shares.
Wash Sale
If the customer sells 200 shares at a loss but has bought the same security within 30 days before or 30 days after the sell, then the sale is a wash sale. If the buy was for 100 shares, only the loss on 100 of the 200 share sale is disallowed and applied to the replacement shares. The customer is allowed a loss on the other 100 shares.
Wash Sale/Short Sell
If the customer has a buy-to-cover 200 shares at a loss but has a short sale of the same security within 30 days before or 30 days after the buy-to-cover, then the buy-to-cover is subject to wash sale treatment. If the short sale was for 100 shares, only the loss on 100 of the 200 share buy-to-cover is disallowed and applied to the replacement shares. The customer is allowed a loss on the other 100 shares.
What is wash sale and what should I know about wash sales?
- A Wash Sale occurs if you sell securities at a loss and buy substantially identical replacement shares within 30 days before or after the sale.
- The Wash Sale Period is 30 days before and 30 days after the sale date, totaling 61 days (including the sale date).
- 30 days before < DATE YOU SELL > 30 days after
What securities are not considered "substantially identical"?
- Bonds issued by one institution, but with different maturity dates and different interest rates
- Common stock and preferred stock of the same company
- Stocks of different companies even if they are in the same industry
