Wash Sales from Trading and Investing

The IRS Wash Sale Rule is an absolute nightmare for active traders and investors!

When trading or investing in the same stocks (or options on the same stocks) over and over again, hundreds or even thousands of wash sales may be generated throughout the tax year. All of these need to be reported on IRS Schedule D

In addition, wash sales need to be calculated across all of your brokerage accounts. They also need to be calculated for what the IRS calls "substantially identical securities" which includes option trades on the same underlying stock or security. This is unbelievably complex and is above and beyond what is reported by most brokerages.

• You cannot depend on your broker profit and loss report because they use the same broker profit loss statements as mentioned above - see our Brokerage Reporting tax topic for details.
• You also cannot depend on common tax software programs such as TurboTax® or TaxCut® because they were never designed designed for such purposes - see our Popular Tax Software tax topic for details.

TradeLog was designed to handle all of the complex wash sale issues and is the preferred tax lot accounting software of many leading trader tax accounting professionals.

How to Calculate Wash Sales

Calculating wash sales is not easy! The IRS expects you to record each and every wash sale throughout the tax year.  For those of you who have ever tried to calculate wash sales for an entire year's worth of trade activity, we don't need to tell you just how painful this can be. 

First you need to identify trades that have been closed at a loss. Then you have to scan backwards and forwards in time to see if you re-purchased the same or "substantially the same" securities within a plus or minus 30 day window.

If you did then, you need to record a wash sale adjustment line on your schedule d.  You also need to adjust the cost basis of the re-purchase shares, moving the loss forward or backwards to this whatever trade triggered the wash sale.

Does all of this sound complicated?  It is if you plan on doing this by hand - see an example of Wash Sales Reported On Schedule D.

But it gets even more complicated when you do not re-purchase an equal number of shares.

Unequal Shares

It is inevitable that an active trader will occasionally (and possibly almost never) buy back an equal number of shares after realizing a loss.  This is where the wash sale rule starts to really get complicated.  IRS publication 550 page 56 states:

More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply.  You do this by matching the shares bought with an unequal number of shares sold. Match the shares bought in the same order you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

The Net Affect

What this effectively does is to start dividing up your wash sales by the minimum number of shares bought or sold.  A couple of simple examples show this quite clearly:

1. You buy 100 shares and sell them at a $200 loss.  You then buy back 50 shares within the 30 day window.  How much of the $200 loss gets moved forward to the cost basis of the 50 shares?  $100 is the right answer (50 sh / 100 sh  x $200). 
2. What  if you bought and sold 100 shares at a loss and then bought back 20 shares and then another 80 shares, the wash sale loss on the 100 shares gets split 20/80 with 20% of the loss going to the first buy of 20 shares and the other 80% going to the other 80 shares.
3. Now what happens if you had bought and sold 1000 shares at a loss and then bought back 200, then 300, then 100, then 600? What if one or more of the re-purchases are sold at a loss and you then buy back a series of unequal numbers of shares? 

It starts to get very complicated, like the branches on a tree.  For an example, please see our Wash Sale Deferral Example page.  Who has time to figure this out manually? 

Understand the wash sale rule in plain english.