Commonly Known Wash Sale Rule – Wait 30 Days After the Sale to Buy Back
You can’t sell shares at a loss and then buy them (or substantially identical shares) back within 30 days or the loss will be disallowed.
Less Commonly Known Rule – Wait 30 Days After the Most Recent Purchase Before Selling
The IRS also requires that, if you held a position and then added more shares to it, you must wait 30 days before selling this position in addition to then waiting 30 more days after the sale before buying it back.
The reason for this is to prevent you from doing something like:
- Own 100 shares of IBM (that you’ve had for years) with an unrealized loss
- You want to recognize the loss this year but still want to hold 100 shares of IBM
- Thinking you’re smart, you buy another 100 shares of IBM today, and then tomorrow you sell the original 100 shares of IBM. You have no intention of buying back any more IBM shares, so you think your work is done. You have your tax loss (from the sale of the original shares) and you have your shiny new 100 shares of IBM that you purchased yesterday
Considering that this is exactly the type of abuse the wash sale rules aim to prevent, it is not allowed. Because you had purchased the stock within 30 days before or after the sale (in this case, 1 day before), you have a wash sale.
Results of a Wash Sale
The losses that you would have taken are deferred (not recognized) and added back into the basis of the remaining shares.
Two Examples from IRS Publication 550
Source: IRS Publication 550
1) Buyback within 30 Days – You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050
2) Purchased Within 30 Days Before Sale – You bought 100 shares of M stock on September 26, 2014, for $5,000. On December 19, 2014, you bought 50 shares of substantially identical stock for $2,750. On December 26, 2014, you bought 25 shares of substantially identical stock for $1,125. On January 9, 2015, you sold for $4,000 the 100 shares you bought in September. You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days before the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 19, 2014, is increased by two-thirds (50 ÷ 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 26, 2014, is increased by the rest of the loss to $1,375 ($1,125 + $250)
Not sure if you have a wash sale on your hands? Want to improve your tax planning going forward? Let us know, we can help!