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What exactly is a wash sale and how to I reconcile them when preparing my Schedule D? A wash sale occurs when there is a loss on the sale or disposition of stock or option. When a loss occurs, the first thing the IRS will look at is if a substantially similar stock or option was purchased 30 days before or 30 days after that sale or disposition. If there was a purchase of that stock within that time frame, the loss that was incurred will be added on to the purchase price of that stock thus washing out or becoming a wash sale. Because the loss is added to your basis, you will eventually be able to take the loss; but talk about complicated. Recordkeeping on wash sales alone could become a nightmare when preparing your Schedule D.

Let’s walk through an example of the wash sale rule.

Sue purchases 100 shares of XYZ on June 1 for $10,000. On July 15, she sales those shares for $8,000, realizing a $2,000 loss. On August 1, she purchases 100 more shares for $9,000. What has she done? If that were the only sale Sue made during the year, she wouldn’t be able to recognize the loss on the sale of her stock. Instead, she would take the $2,000 and add it on to the basis of the stock she still owns, making her basis in that stock $11,000. Imagine what that could mean for traders preparing a Schedule D who have thousands of transactions, often with the same stock.

Why would the IRS make such a crazy rule? The last thing the IRS wants to do is give someone the opportunity to receive a tax deduction while maintaining the same economic position. The wash sale rule doesn’t just include the buying and selling of stock in your personal brokerage account. The IRS went as far as to say that you couldn’t even sale stock in your personal account and purchase substantially similar stock in your IRA and take a deduction for the personal loss. That's right, we now have IRA wash sales due to a recent IRS ruling.

The wash sale rule applies to all taxpayers, including corporations. However, the wash sale rules do not apply to any loss attributable to a section 1256 contract. When a wash sale occurs, the holding period of the new securities includes the period that the taxpayer held the securities on which the loss was not deductible.

On the bright side, the IRS gave traders an “out” – the mark-to-market election. However, only a “trader in security” can make that election. Let our tax professionals make sense of the nightmare of wash sales today. Need help with wash sales? We will have your trade data reconciled correctly with a 7 day guaranteed turn around! Click here for more information.

About Michelle Boyer, CPA

After working as a Revenue Agent for the Internal Revenue Service, Michelle Boyer, CPA moved to the private tax sector taking with her valuable insider knowledge of IRS procedures. After spending years practicing in the area of trader taxation, Michelle witnessed a vast amount of misconceptions about day trading rules and traders accounting regulation. This inspired her to develop a team of hand-selected, experienced, trader tax professionals. Together, her team has created one of the largest resources where traders can come for accurate and legal tax reduction strategies and advice.

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