Wash sale?

Yes

OK, then, (sigh!) let me make sure I understand how it works, as I try following IRS pub 550 (2007).

Here's an example.

On 9-23-08, TP sold 281 shares of AbcCo. All were "identified shares" (pub 550 page 43).

The shares had been purchased like this:

Part 1 Purchased 9-16-08

25 shares Basis $2,816 Proceeds $1,875 P/L -941

Part 2 Purchased 12-31-07

37 shares Basis $4,567 Proceeds $2,775 P/L -1,792

Part 3 Purchased 12-22-07

98 shares Basis $5,921 Proceeds $7,350 P/L +1,429

Part 4 Purchased 3-30-07

111 shares Basis $6,789 Proceeds $8,325 P/L +1,536

Part 5 Purchased 2-1-07

10 shares Basis $800 Proceeds $750 P/L -50

Then, on 10-3-08, TP bought 288 shares of AbcCo for $17,280, or $60 per share.

Any other shares held during September-October were acquired before August.

Is the following correct?

There are two purchases in the wash sale window.

First is the "Part 1" purchase made 9-16-08. But since it was sold as part of the 9-23-08 sale, there's no ongoing basis to affect. So the wash rule doesn't come into play. Likewise, if (in a different example) Part 1 were a profit rather than a loss, the wash rule wouldn't come into play.

Second is the 10-3-08 purchase. Apparently this purchase has to be subdivided into three blocks for tax records: one block for part 2, one for part 5, and one for the remainder. Part 1 doesn't participate because it's already taken care of; Parts 3 and 4 don't participate because each is a profit.

Ongoing, the blocks are treated like this:

Block 1 (for Part 2)

37 shares Basis 60*37+1792 = 4,012 Treat as held since 12-31-07

Block 2 (for Part 5)

10 shares Basis 60*10+50 = 650 Treat as held since 2-1-07

Block 3 (remainder)

241 shares Basis 60*241 = 14,460 Treat as held since 10-3-08

On 2008 Schedule D, it seems easiest to report each of the five parts on a separate line: the first three in the short-term list; the other two in the long-term list. The figures will be as shown above for the five parts. Then, there will be an extra line after Part 2's line and an extra line after Part 5's line.

Part 2's extra line Column (a) "Wash Sale" Column (f) +1,792

Part 5's extra line Column (a) "Wash Sale" Column (f) +50

If (in a different example) the number of 10-3-08 shares purchased were less than 47 (Parts 2 and 5 combined), the wash sale rule would be applied to Part 5 first, with any excess applying to Part 2. Likely, one Part would have to be split into two sub-Parts: one affected by the rule and one not.

I realize this is a long post. If you've reached this far, thanks for your patience.

[...]

Well, I got this far, but not by reading it all! ;-)

If I understand your original post correctly, the answer is: you have to match the sales which resulted in a loss against the purchases made within plus/minus 30 days, in FIFO order by default but possibly in some other order if you followed the rules (i.e. notify broker in writing in advance of sale). IOW, you can't report the sale as a single mono-transaction, you have to break it out on Schedule D according to the nature (long-term, short-term, wash, etc) of each portion of the sale.

It is true that some wash sales "net out" with subsequent or previous non-wash sales, if for example a single stock is bought and sold over and over.

-Mark Bole

Shares sold at a loss may not be purchased again for the next 30 day to avoid the wash rule. It doesn't matter when you bought the original shares, just the fact that you sold at a loss and then repurchased within the wash window. So your note above "since it was sold as part of the 9-23-08 sale, there's no ongoing basis to affect" seems incorrect. That's when I stopped reading.

Joe

I don't understand your statement about there not being any ongoing basis so you can disregard the wash sale rule relating to the 9/16 purchase and sale on 9/23.

You used specific ID. You replaced the shares you bought on 9/16 and sold at a loss on 9/23 within the 30 day window. Therefore, the loss on 9/23 of the 9/16 shares is not a recognized loss. You have to adjust the basis of those shares by the disallowed loss.

Thanks. I see now that I left something out.

If I understand correctly, since the 9/16 shares were themselves purchased within the 30 day window, there should be an extra $941 "Wash Sale" line on Schedule D for Part 1, nullifying the loss for Part 1.

I meant that the wash sale for the 9/16 shares doesn't affect future tax years. But (as you pointed out) I left out its wash-sale Schedule D line for 2008.

But also, the basis of the 9/16 shares would be adjusted too. As pub 550 says, "add the disallowed loss to the cost of the new stock or securities." This nullifies the nullification.

After all, the idea is to "postpone the loss deduction until the disposition of the new stock," which in this case is the same batch of shares.

So the Part 1 transaction: Purchased 9-16-08 25 shares Basis $2,816 Proceeds $1,875 P/L -941

would be reported on Schedule D in two lines:

(a) 25 shares AbcCo (b) 9-16-08 (c) 9-23-08 (d) 1,875 (e) 3,757 (f) 1,882

(a) Wash Sale (f) 941

Is this right now?

Maybe it's Sunday or maybe it's that we're just two days away from the election or that Texas tech beat Texas..... but this is getting too complicated....

You sold 25 shares on 9/23 at a loss of $941. You enter that in Part I of the 1040. Right below that entry you enter the wash sale that includes a +941 in Column f. You are done with that transaction.

Your adjusted basis in the 25 replacement shares is the $1500 you paid for them plus the disallowed loss of $941 = $2441. This is the same as your original cost of $2816 plus your add'l cost of $1500 less your proceeds of $1875.

....

In what has to be the most exciting, well played game of the season!

I live here in Big Ten country, in a town where poisonous nuts are celebrated, but did watch just about the whole game, and those Red Raiders playd enormously well. As did Texas.

Part I of the 1040 schedule D, that is.

I think I see the disconnect.

When I read in pub 550 page 55, "Match the shares bought in the same order that you bought them, beginning with the first shares bought," I looked at the shares bought in the wash-sale time window: 9-16-08 bought 25 shares 10-3-08 bought 288 shares So I matched the 9-16-08 shares first, even though they were sold as part of the wash sale.

Your response indicates that the shares sold should not be matched, right? This is logical, though the case doesn't seem to be spelled out specifically in pub 550.