Q1: It's about the holding period of the replacement security. There're several situations possible. Let's denote the purchase of shares (that will later be sold at a loss) as Xb. Let's denote the sale at loss as Xs and the other shares that were purchased within the wash sale period as Yb. Let's denote the wash sale period beginning and ending by [ and ]. Let's depict this on a timeline (left to right: past to future): Case 1: Xb ... [ ... Yb ... Xs ... ] Case 2: Xb ... [... Xs ... Yb ... ] Case 3: [... Ya ... Xb ... Xs ... ] Case 4: [... Xb ... Yb ... Xs ... ] Case 5: [... Xb ... Xs ... Yb ... ] So, if I need to adjust Y's basis due to the wash sale, I also need to adjust Y's purchase date (cite from pub550:"If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. 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 begins on the same day as the holding period of the stock or securities sold.") I basically want to confirm that Yb may adjust into the past (cases 1,2,4,5) and into the future (case 3). If it's not how this is done, then how is it?
Q2: If I adjust (reduce) the basis of some stock due to a wash sale, then it may happen that for that stock the adjusted basis is less than the proceeds and so, the loss has just moved to a different place. And this is asking to apply the wash sale rules again and again and again, until the loss is fully absorbed by the gains or there's no way to absorb it entirely (all wash sale rules exhausted) and it stays as a loss at which point some other rules may come in play (i.e. if it's a net loss there're limits on how much can be claimed). Did I get it right that after I've moved a loss to a different place (having applied the wash sale rules) I need to look again if that newly created loss may cause further wash sale adjustments?
I've read pub 550 and the following, but it's still unclear what the new holding period (the date of acquire) should be and if the wash sale rules apply recursively: