Vanguard & 2012 1099-B

Did you close out your entire position? Then everything is allowed.

U> > experienced this or do you have an explanation as to why this

Did you close out your entire position? Then everything is allowed.

publication or other site that I could refer to for future reference - Don

See the next to the last sentence below.

Wash Sales

You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.

A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,

Acquire substantially identical stock or securities in a fully taxable trade,

Acquire a contract or option to buy substantially identical stock or securities, or

Acquire substantially identical stock for your individual retirement account (IRA) or Roth IRA.

If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

The second poster , Barry, indicted that if the mutual fund account is closed out then the entire loss is allowed , i.e. none of the loss is disallowed due to purchases of identical shares within the 60 day wash sale window - in the case here there were X shares on 12/31/2011, some were sold in January 2012, more in April 2012 , and the balance in June 2012 - there were dividends credited at the end of each month during this period and so the wash sale rules would have come into play I would think - and again I'm trying to get some affirmation that Barry is correct along with a regulatory cite or IRS publication to support the assertion.

The pracical effect is that if you ignore the wash sale here, your bottom loss gain/loss is not affected.

Since more and more broker's 1099-B reported sales include the wash sale adjustment, you are asking for a hassle if you ignore what was reported by the broker to the IRS.

The IRS has never agreed to let you ignore wash sales in the above situation, and with wash sales being reported on form 1099-B, the path of least hassle is to report them just as the broker has.

The IRA publication says it all.

The disallowed loss is added to the cost basis of the new shares, and can be taken when those new shares are sold. If you've sold your entire position, that includes the new shares, so you can take the disallowed loss now.

Another way to look at it: the disallowed loss is added to the cost basis of your remaining shares. But if you have no remaining shares, where is the cost basis added?

thanks Art - my questions are purely academic - I'm not trying to avoid the wash sale rules - in fact my 1099-B doesn't show any disallowed shares due to the wash sale rule -we're dealing with mutual fund shares and the average cost method - I'm also familiar with how to adjust the basis for any disallowed shares.

I've been unsuccessful trying to get an explanation from Vanguard as to why wash sales, i.e. distribution and repurchase , weren't reflected on the 1099-B.

Again the second poster Barry gave what I thought was an explanation but I need to see an IRS cite or something to affirm what he is saying - there's nothing that I can see in Pub. 550 that discusses a foregiveness of the wash sale rules upon complete closeout of a fund.

Barry ,

let's look at an example : I buy 100 shares today & in 2 months I buy 100 more - the next day I sell 200 with a short term loss of 1000 ; I could argue that IRS would disallow (100/200)(1000) or 500 and this would go to Schedule D.

absent a very specific IRS cite , it's anybody's guess how IRS would choose to handle it ; and by the way neither IRS publication 590(IRA's) or 550 address what happens at closeout - I thank you for your time and input but I need to have a cite or it's just 2 opinions.

thanks again,

Don

It's not "forgiveness", it's just that it makes no difference in the tax. You add the disallowed loss to the cost basis of the replacement shares. When you sell those shares, their capital gain is reduced by this amount (or their loss is increased). If you sell all those shares at the same time as the wash sale, the disallowed loss and the reduced gain simply cancel each other out.

That's only true if you're out of the position for the entire wash sale window.

Depends what happens next.

If you don't buy any shares during the wash sale window, you are correct.

If you do buy shares during the window, that's where the cost basis is added.

If you don't buy shares during the wash sale window, you don't have a wash sale in the first place.

But if you sell all those shares by the end of the year, and don't replace them during the following January, it doesn't matter. The disallowed loss in the wash sale is exactly balanced by the increased loss (or reduced gain) in the later sale. When you calculate your net CG, it comes out the same either way.

This does raise an interesting point. Suppose you completely sell at a loss on December 20, and had no purchases during the previous 30 days. On Jan 1 you file your taxes, and report this loss.

Then on January 15 you purchase new shares in the security, which now makes that previous sale a wash sale. It seems like you must file an amended return to increase your capital gain for the previous year.

I doubt this comes up much. First, I suspect most savvy investors would just wait a week to repurchase, to avoid creating a wash. Second, how many people are able to do their taxes so early in January -- if you're an investor, you generally need to wait for all the 1099's to arrive.

so in my example can I use the entire loss of $1000 on my tax return ??

The above example is a completed sale, wash will not even be an issue unless you buy any shares sooner than 31 days after the sale.

The wash sale window goes both directions. It's a wash if you bought shares within 30 days *before* the sale as well. Since the above sale was 1 day after the purchase, it's within the window.

thanks Joe , where in IRS regulations or even a publication does it mention that a wash sale is not an issue where a completed sale is involved ? in my example, it seems like $500 of the $1000 loss would be disallowed .

You wrote - I buy 100 shares today & in 2 months I buy 100 more

- the next day I sell 200 with a short term loss of 1000 ; I could argue that IRS would disallow (100/200)(1000) or 500 and this would go to Schedule D.

The rules of a wash sale are pretty specific. You have a stock trading below cost. You wish to 'take the loss', i.e. sell it. But, you still wish to own the stock. You have two choices, buy it, doubling up, 31 days before you sell the losing shares, or wait 31 days after the sale to buy shares back. In your example, you bought shares and sold for a loss. Period. I can buy shares at 11 am, decide it was a mistake and sell at noon for a loss. In either case the loss is not 'washed' until and unless we buy new shares within 31 days after that sale.

Read

Joe, just a simple yes or no - at t=0 I buy 100 shares of a mutual fund, at t+60days I buy 100 additional shares , then at t+61days I sell all 200 at a loss of $1000 - can I claim the entire $1000 loss on my tax return or just $500, i.e. (100/200)($1000) ?

and Joe the wash sale window is a + or - 30 day window .

Are these the ONLY shares of this mutual fund that you own, so there are no remaining shares after t+61?

How many times do you have to be told: Yes (assuming the answer to the above question is Yes).

Just follow the instructions in Pub 550 and it's clear. The loss on the first 100 shares is added to the cost basis of the second 100 shares (the "replacement shares"). When you sell the replacement shares, you can claim the loss. Since you sold them as well on t+61, you're able to claim the entire loss at that time.

Maybe running through this with numbers will make it clearer to the OP. Assuming these are the only shares owned and transacted.

Day 1: Buy 100 shares @$10 Day 60: Buy 100 shares @$5 Day 61: Sell 200 shares @5

You have a sale transaction on Day 61. Gross proceeds from the sale = 200 * $5 = $1000 Basis in shares sold = 100 * $10 + 100 * $5 = $1500 Net gain/loss = proceeds - basis = $1000 - $1500 = -$500 (a loss)

Now we can make this slightly more complicated by doing the following (with FIFO):

Day 1: Buy 100 shares @$10 [lot 1] basis $1000 Day 60: Buy 100 shares @$5 [lot 2] basis $500 Day 61: Sell 100 shares @5 Day 62: Sell 100 shares @5

Here you have two sales transactions: Day 61: Sell lot 1, proceeds = $500, basis (FIFO) = $1000 But this is a wash sale, so the $500 loss is disallowed. However, the disallowed loss increases the basis of remaining shares, so the basis for lot 2 increases from $500 to $1000 Net gain/loss is $0

Day 62: Sell lot 2, proceeds = $500, basis = $500 original + $500 from disallowed wash sale net gain/loss is $500 proceeds minus $1000 adjusted basis = $500 loss. This is not a wash sale since there are no other shares owned or bought within 30 days. In effect, the $500 loss has been transferred from the first sale to the second by the operation of the wash sale rules.

The first example can be thought of as the combination of the two transactions in the second example. Since that sale is listed on a single line of Schedule D, it doesn't really matter whether you transfer the $500 basis from the first lot to the second since they are both added together and 1000 + 500 = 500 + 1000 (because addition is commutative. Thank you, class)

-- Tom Russ (not Lehrer)