Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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AnEngineer
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by AnEngineer »

Lee_WSP wrote: Wed Jan 12, 2022 5:02 pm
AnEngineer wrote: Wed Jan 12, 2022 4:56 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:52 pm It really clarifies the unfair and ridiculous outcome of buying 200 shares (in one lot), then selling 100 shares and having a wash sale and an adjusted basis on the remaining 100 shares. Which is what would happen under the regs.
The question is, whether or not you can rely on that ruling in order to get around the wash sale rules as proposed by iceport earlier. The presence of the "merely" in the ruling indicates to me that we should be hesitant to do so.
iceport wrote: Mon Jan 10, 2022 2:36 pm Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:
Taxpayers can rely upon revenue rulings as binding for the issue the revenue ruling addresses. In the case of this particular rev rul, the only issue addressed is whether retained shares of the same lot trigger the wash sale "merely because" they are still held. The service said they do not. They do not address previously sold shares not of the same lot. That is all it says, nothing more.
Right, but in the above scenario, the idea is that first you create a loss sale with the original shares, and then when you sell the new shares, because it's part of a larger lot, you don't get a second wash sale. I would have thought that it's a wash sale without Rev. Rul. 56-602.

However, finally reading it myself in detail, I think the following sentence covers iceport's situation: "However, the deduction will be disallowed if the taxpayer, in another transaction occurring within the period beginning 30 days before the date of the sale and ending 30 days after such date, has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, additional substantially identical stock or securities."

Still, if step 1 above is more than 30 days before step 3, the Rev. Rul. seems to imply that you can get the loss and keep your stock. But given the "merely", I wouldn't push it.
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Lee_WSP
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

Deleted. Wrong thread
Last edited by Lee_WSP on Wed Jan 12, 2022 6:33 pm, edited 1 time in total.
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iceport
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

AnEngineer wrote: Wed Jan 12, 2022 5:11 pm Still, if step 1 above is more than 30 days before step 3, the Rev. Rul. seems to imply that you can get the loss and keep your stock. But given the "merely", I wouldn't push it.
Thanks for this. I was starting to feel like I was going crazy or something.

I generally agree with you, but I place even more significance on that little word. The primary reason is that without that qualifier — which I translate in this context to mean "if the only reason is" — the IRS would be powerless to prevent a blatant, outright violation of the whole purpose for the existence of wash sale rule. With it, they are able to consider other facts and circumstances — like, maybe, booking a loss while staying invested.

Also, just to fill in a missing detail in my example, I was assuming the older shares were bought outside of the wash sale period, as was the case in the OP. It's a significant detail, in light of the last sentence of Rev. Rul. 56-602. So the ambiguity applies, as you suggest.
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investlikebogle
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by investlikebogle »

VartAndelay wrote: Fri Jan 07, 2022 3:33 pm
livesoft wrote: Fri Jan 07, 2022 3:20 pm
VartAndelay wrote: Fri Jan 07, 2022 3:00 pm... Why in the world should the final cost basis be able to be greater, let alone so much greater, than any of the actual purchases?
Because that way the previously temporarily disallowed losses from any/all wash sales will be realized when you finally sell any and/or all replacement shares that created the wash sales in the first place. That is, your losses do not magically disappear, but instead you get them all back to reduce any gains (or increase any losses) when you eventually sell those "replacement" shares.
Well, I understand that. But exactly the same could still be said if the rule was applied as I posited in my attempt at calculating things. In other words, I understand why it may make sense to have a rule to disallow certain losses in specific scenarios, and why that could result in higher remaining cost bases than if the rule did not exist. And I realize how it would "net out" to be the same if all shares were sold. But I simply still do not understand how it is logical at all for the cost bases to be higher than any of the actual purchase prices. I can't come up with a coherent rule that would allow for this.

What I'm trying to say is:
buy for $10/share
sell for $5/share
buy for $4/share

Ok, I can see why the loss from the sale might be disallowed, and how the final cost basis might be >$4/share. But I don't see why on earth it should be >$10/share with any logical rules. That is not to say I don't see how it could be >$10/share with the existing rules. But if it is, then I do not think the existing rules are logical. And that is why I am still trying to understand this. I am still trying to reread what others have written here and understand their calculations.
It’s very easy to see that final cost basis can be greater than $10.

Suppose in your example, you sell for $1 instead of $5. You have a $9 loss which is disallowed. The cost basis of $4 on replacement shares would increase to $13.

It is not illogical. The reason cost basis increases is because disallowed loss would be allowed later on when you sell replacement shares.
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Lee_WSP
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

AnEngineer wrote: Wed Jan 12, 2022 5:11 pm
Lee_WSP wrote: Wed Jan 12, 2022 5:02 pm
AnEngineer wrote: Wed Jan 12, 2022 4:56 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:52 pm It really clarifies the unfair and ridiculous outcome of buying 200 shares (in one lot), then selling 100 shares and having a wash sale and an adjusted basis on the remaining 100 shares. Which is what would happen under the regs.
The question is, whether or not you can rely on that ruling in order to get around the wash sale rules as proposed by iceport earlier. The presence of the "merely" in the ruling indicates to me that we should be hesitant to do so.
iceport wrote: Mon Jan 10, 2022 2:36 pm Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:
Taxpayers can rely upon revenue rulings as binding for the issue the revenue ruling addresses. In the case of this particular rev rul, the only issue addressed is whether retained shares of the same lot trigger the wash sale "merely because" they are still held. The service said they do not. They do not address previously sold shares not of the same lot. That is all it says, nothing more.
Right, but in the above scenario, the idea is that first you create a loss sale with the original shares, and then when you sell the new shares, because it's part of a larger lot, you don't get a second wash sale. I would have thought that it's a wash sale without Rev. Rul. 56-602.

However, finally reading it myself in detail, I think the following sentence covers iceport's situation: "However, the deduction will be disallowed if the taxpayer, in another transaction occurring within the period beginning 30 days before the date of the sale and ending 30 days after such date, has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, additional substantially identical stock or securities."

Still, if step 1 above is more than 30 days before step 3, the Rev. Rul. seems to imply that you can get the loss and keep your stock. But given the "merely", I wouldn't push it.
Too many threads on this.

I'm not seeing your confusion.

One hundred shares sold. Not substantially identical shares.

Two hundred purchased. Substantially identical, washes first sale.

One hundred shares sold. No substantially identical shares yet because shares from the same lot cannot trigger the wash sale as they are disregarded. Per revenue ruling.

Contrast this with purchasing the 200 shares in two lots of 100 which would not have the blessing of the ruling.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by AnEngineer »

Lee_WSP wrote: Wed Jan 12, 2022 6:38 pm
AnEngineer wrote: Wed Jan 12, 2022 5:11 pm
Lee_WSP wrote: Wed Jan 12, 2022 5:02 pm
AnEngineer wrote: Wed Jan 12, 2022 4:56 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:52 pm It really clarifies the unfair and ridiculous outcome of buying 200 shares (in one lot), then selling 100 shares and having a wash sale and an adjusted basis on the remaining 100 shares. Which is what would happen under the regs.
The question is, whether or not you can rely on that ruling in order to get around the wash sale rules as proposed by iceport earlier. The presence of the "merely" in the ruling indicates to me that we should be hesitant to do so.
iceport wrote: Mon Jan 10, 2022 2:36 pm Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:
Taxpayers can rely upon revenue rulings as binding for the issue the revenue ruling addresses. In the case of this particular rev rul, the only issue addressed is whether retained shares of the same lot trigger the wash sale "merely because" they are still held. The service said they do not. They do not address previously sold shares not of the same lot. That is all it says, nothing more.
Right, but in the above scenario, the idea is that first you create a loss sale with the original shares, and then when you sell the new shares, because it's part of a larger lot, you don't get a second wash sale. I would have thought that it's a wash sale without Rev. Rul. 56-602.

However, finally reading it myself in detail, I think the following sentence covers iceport's situation: "However, the deduction will be disallowed if the taxpayer, in another transaction occurring within the period beginning 30 days before the date of the sale and ending 30 days after such date, has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, additional substantially identical stock or securities."

Still, if step 1 above is more than 30 days before step 3, the Rev. Rul. seems to imply that you can get the loss and keep your stock. But given the "merely", I wouldn't push it.
Too many threads on this.

I'm not seeing your confusion.

One hundred shares sold. Not substantially identical shares.

Two hundred purchased. Substantially identical, washes first sale.

One hundred shares sold. No substantially identical shares yet because shares from the same lot cannot trigger the wash sale as they are disregarded. Per revenue ruling.
I don't think I'm confused, just doubtful that the RR means that you always avoid wash sales on the same lot. I don't think the RR is on point enough to support your last paragraph. If you're right, I can effectively avoid the wash sale rule whenever I'm holding shares at a loss via the method outlined to end up taking the loss but keeping the shares (ignoring a little transient activity of maybe a few minutes).
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

AnEngineer wrote: Wed Jan 12, 2022 6:48 pm
Lee_WSP wrote: Wed Jan 12, 2022 6:38 pm
AnEngineer wrote: Wed Jan 12, 2022 5:11 pm
Lee_WSP wrote: Wed Jan 12, 2022 5:02 pm
AnEngineer wrote: Wed Jan 12, 2022 4:56 pm
The question is, whether or not you can rely on that ruling in order to get around the wash sale rules as proposed by iceport earlier. The presence of the "merely" in the ruling indicates to me that we should be hesitant to do so.

Taxpayers can rely upon revenue rulings as binding for the issue the revenue ruling addresses. In the case of this particular rev rul, the only issue addressed is whether retained shares of the same lot trigger the wash sale "merely because" they are still held. The service said they do not. They do not address previously sold shares not of the same lot. That is all it says, nothing more.
Right, but in the above scenario, the idea is that first you create a loss sale with the original shares, and then when you sell the new shares, because it's part of a larger lot, you don't get a second wash sale. I would have thought that it's a wash sale without Rev. Rul. 56-602.

However, finally reading it myself in detail, I think the following sentence covers iceport's situation: "However, the deduction will be disallowed if the taxpayer, in another transaction occurring within the period beginning 30 days before the date of the sale and ending 30 days after such date, has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, additional substantially identical stock or securities."

Still, if step 1 above is more than 30 days before step 3, the Rev. Rul. seems to imply that you can get the loss and keep your stock. But given the "merely", I wouldn't push it.
Too many threads on this.

I'm not seeing your confusion.

One hundred shares sold. Not substantially identical shares.

Two hundred purchased. Substantially identical, washes first sale.

One hundred shares sold. No substantially identical shares yet because shares from the same lot cannot trigger the wash sale as they are disregarded. Per revenue ruling.
I don't think I'm confused, just doubtful that the RR means that you always avoid wash sales on the same lot. I don't think the RR is on point enough to support your last paragraph. If you're right, I can effectively avoid the wash sale rule whenever I'm holding shares at a loss via the method outlined to end up taking the loss but keeping the shares (ignoring a little transient activity of maybe a few minutes).
It does actually allow you to do that so long as you don't acquire substantially identical shares 30 days after and the day of.

Although I suppose the service could take the position that you can't choose which stocks are washed and thus the adjusted basis is always with the remaining shares. This was not addressed in the ruling. Just that the same lot cannot wash the same lots other shares.
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iceport
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

Lee_WSP wrote: Wed Jan 12, 2022 6:51 pm It does actually allow you to do that so long as you don't acquire substantially identical shares 30 days after and the day of.
Would that still be your assessment if Rev. Rul. 56-602 were written like this?
Accordingly, it is held that the deduction of a loss sustained on the sale of a portion of the shares of stock purchased in one lot by the taxpayer less than 30 days before the sale will not be disallowed by reason of the provisions of section 1091 of the Code [if the only reason for doing so is] because the taxpayer acquired, in the original purchase, more shares than he later sold.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

iceport wrote: Wed Jan 12, 2022 7:10 pm
Lee_WSP wrote: Wed Jan 12, 2022 6:51 pm It does actually allow you to do that so long as you don't acquire substantially identical shares 30 days after and the day of.
Would that still be your assessment if Rev. Rul. 56-602 were written like this?
Accordingly, it is held that the deduction of a loss sustained on the sale of a portion of the shares of stock purchased in one lot by the taxpayer less than 30 days before the sale will not be disallowed by reason of the provisions of section 1091 of the Code [if the only reason for doing so is] because the taxpayer acquired, in the original purchase, more shares than he later sold.
Yes. It still says that shares from the same lot are disregarded. But see my edit above.

The service may challenge the ability to specify which shares of the preceding lot receive the adjusted basis. That's up in the air.

The brokerage simply marks it for you that there are washed shares. The actual washing is done on the form.

*It may not be up in the air. I haven't worked through that problem on the form.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by AnEngineer »

Lee_WSP, I'm coming around somewhat to your reading of the ruling, it's just so obviously against the intent of the wash sale law in that case that I find it hard to count on, especially when it's easier to just avoid substantially identical securities.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by investlikebogle »

iceport wrote: Mon Jan 10, 2022 2:36 pm
FactualFran wrote: Mon Jan 10, 2022 12:38 pm
iceport wrote: Mon Jan 10, 2022 4:49 am Is it appropriate to continue to treat the 90 shares that became replacement shares for a prior wash sale as still being part of its original tax lot, indistinguishable from the remaining shares? Those 90 shares have had their cost bases and holding periods adjusted to account for the characteristics of their matched wash shares, purchased in October, 2021. Their characteristics have thus been changed with those adjustments. And isn't it conceivable the remaining shares were bought on purpose to replace *those* shares, the October 2021 wash shares?
In my opinion, it is appropriate to treat all shares of a purchase lot as being part of that purchase lot, even the shares of the lot that have wash sales adjustments.

The order in which the shares of a purchase lot are disposed is likely arbitrary. In the details that gave, I disposed of the 10 shares with a wash sale adjustment first. It is likely that it would be valid to defer disposing those share and have them be part of the 15 shares that remain after the last transaction in the example.

The two different disposition orders result in different amounts of reportable loss and basis of the remaining 15 shares. Different disposition orders should have the same sum of reportable loss and remaining basis.

In my opinion, it does not matter if the purpose was to replace shares. What matters is whether shares were bought in the 61 day period and are not part of the same purchase lot as the shares being sold at a loss.
It does not matter? The whole point of the wash sale rule doesn't matter when interpreting how the rule works?

That doesn't make sense. Then why are the Fairmark.com articles on wash sales littered with references to the whole point: to prevent investors from claiming a loss for selling while staying invested in the same security?

Under your interpretation, what would stop someone from doing exactly that?

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

Does it make sense to you that that would be allowed?
Why would these not considered replacement shares?

Because of wash sale adjustment, 100 out of 200 shares have
- different holding period
-different cost basis

Even though they were bought together.

If there was no wash sale adjustment, these shares were
- bought in the same lot
- same holding period
- same cost basis

So they would not be replacement shares.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

investlikebogle wrote: Wed Jan 12, 2022 9:26 pm
iceport wrote: Mon Jan 10, 2022 2:36 pm
FactualFran wrote: Mon Jan 10, 2022 12:38 pm
iceport wrote: Mon Jan 10, 2022 4:49 am Is it appropriate to continue to treat the 90 shares that became replacement shares for a prior wash sale as still being part of its original tax lot, indistinguishable from the remaining shares? Those 90 shares have had their cost bases and holding periods adjusted to account for the characteristics of their matched wash shares, purchased in October, 2021. Their characteristics have thus been changed with those adjustments. And isn't it conceivable the remaining shares were bought on purpose to replace *those* shares, the October 2021 wash shares?
In my opinion, it is appropriate to treat all shares of a purchase lot as being part of that purchase lot, even the shares of the lot that have wash sales adjustments.

The order in which the shares of a purchase lot are disposed is likely arbitrary. In the details that gave, I disposed of the 10 shares with a wash sale adjustment first. It is likely that it would be valid to defer disposing those share and have them be part of the 15 shares that remain after the last transaction in the example.

The two different disposition orders result in different amounts of reportable loss and basis of the remaining 15 shares. Different disposition orders should have the same sum of reportable loss and remaining basis.

In my opinion, it does not matter if the purpose was to replace shares. What matters is whether shares were bought in the 61 day period and are not part of the same purchase lot as the shares being sold at a loss.
It does not matter? The whole point of the wash sale rule doesn't matter when interpreting how the rule works?

That doesn't make sense. Then why are the Fairmark.com articles on wash sales littered with references to the whole point: to prevent investors from claiming a loss for selling while staying invested in the same security?

Under your interpretation, what would stop someone from doing exactly that?

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

Does it make sense to you that that would be allowed?
Why would these not considered replacement shares?

Because of wash sale adjustment, 100 out of 200 shares have
- different holding period
-different cost basis

Even though they were bought together.

If there was no wash sale adjustment, these shares were
- bought in the same lot
- same holding period
- same cost basis

So they would not be replacement shares.
Under the regs, they are. But under rev rul 56-602, the shares from the same lot cannot be used to wash the shares from the same lot. I’m pretty sure we’ve quoted that extensively by now.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by investlikebogle »

Lee_WSP wrote: Wed Jan 12, 2022 9:30 pm
investlikebogle wrote: Wed Jan 12, 2022 9:26 pm
iceport wrote: Mon Jan 10, 2022 2:36 pm
FactualFran wrote: Mon Jan 10, 2022 12:38 pm
iceport wrote: Mon Jan 10, 2022 4:49 am Is it appropriate to continue to treat the 90 shares that became replacement shares for a prior wash sale as still being part of its original tax lot, indistinguishable from the remaining shares? Those 90 shares have had their cost bases and holding periods adjusted to account for the characteristics of their matched wash shares, purchased in October, 2021. Their characteristics have thus been changed with those adjustments. And isn't it conceivable the remaining shares were bought on purpose to replace *those* shares, the October 2021 wash shares?
In my opinion, it is appropriate to treat all shares of a purchase lot as being part of that purchase lot, even the shares of the lot that have wash sales adjustments.

The order in which the shares of a purchase lot are disposed is likely arbitrary. In the details that gave, I disposed of the 10 shares with a wash sale adjustment first. It is likely that it would be valid to defer disposing those share and have them be part of the 15 shares that remain after the last transaction in the example.

The two different disposition orders result in different amounts of reportable loss and basis of the remaining 15 shares. Different disposition orders should have the same sum of reportable loss and remaining basis.

In my opinion, it does not matter if the purpose was to replace shares. What matters is whether shares were bought in the 61 day period and are not part of the same purchase lot as the shares being sold at a loss.
It does not matter? The whole point of the wash sale rule doesn't matter when interpreting how the rule works?

That doesn't make sense. Then why are the Fairmark.com articles on wash sales littered with references to the whole point: to prevent investors from claiming a loss for selling while staying invested in the same security?

Under your interpretation, what would stop someone from doing exactly that?

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

Does it make sense to you that that would be allowed?
Why would these not considered replacement shares?

Because of wash sale adjustment, 100 out of 200 shares have
- different holding period
-different cost basis

Even though they were bought together.

If there was no wash sale adjustment, these shares were
- bought in the same lot
- same holding period
- same cost basis

So they would not be replacement shares.
Under the regs, they are. But under rev rul 56-602, the shares from the same lot cannot be used to wash the shares from the same lot. I’m pretty sure we’ve quoted that extensively by now.
Doesn’t this rule refer to the “simple case” where shares in the same lot has not been adjusted already? I think context of this rule is also important.

In the above example, stock exposure remains the same so loss should be disallowed, which is the intent behind wash sale.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

investlikebogle wrote: Wed Jan 12, 2022 10:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 9:30 pm
investlikebogle wrote: Wed Jan 12, 2022 9:26 pm
iceport wrote: Mon Jan 10, 2022 2:36 pm
FactualFran wrote: Mon Jan 10, 2022 12:38 pm
In my opinion, it is appropriate to treat all shares of a purchase lot as being part of that purchase lot, even the shares of the lot that have wash sales adjustments.

The order in which the shares of a purchase lot are disposed is likely arbitrary. In the details that gave, I disposed of the 10 shares with a wash sale adjustment first. It is likely that it would be valid to defer disposing those share and have them be part of the 15 shares that remain after the last transaction in the example.

The two different disposition orders result in different amounts of reportable loss and basis of the remaining 15 shares. Different disposition orders should have the same sum of reportable loss and remaining basis.

In my opinion, it does not matter if the purpose was to replace shares. What matters is whether shares were bought in the 61 day period and are not part of the same purchase lot as the shares being sold at a loss.
It does not matter? The whole point of the wash sale rule doesn't matter when interpreting how the rule works?

That doesn't make sense. Then why are the Fairmark.com articles on wash sales littered with references to the whole point: to prevent investors from claiming a loss for selling while staying invested in the same security?

Under your interpretation, what would stop someone from doing exactly that?

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

Does it make sense to you that that would be allowed?
Why would these not considered replacement shares?

Because of wash sale adjustment, 100 out of 200 shares have
- different holding period
-different cost basis

Even though they were bought together.

If there was no wash sale adjustment, these shares were
- bought in the same lot
- same holding period
- same cost basis

So they would not be replacement shares.
Under the regs, they are. But under rev rul 56-602, the shares from the same lot cannot be used to wash the shares from the same lot. I’m pretty sure we’ve quoted that extensively by now.
Doesn’t this rule refer to the “simple case” where shares in the same lot has not been adjusted already? I think context of this rule is also important.

In the above example, stock exposure remains the same so loss should be disallowed, which is the intent behind wash sale.
I know of no case law one way or the other.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by investlikebogle »

Lee_WSP wrote: Wed Jan 12, 2022 10:44 pm
investlikebogle wrote: Wed Jan 12, 2022 10:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 9:30 pm
investlikebogle wrote: Wed Jan 12, 2022 9:26 pm
iceport wrote: Mon Jan 10, 2022 2:36 pm

It does not matter? The whole point of the wash sale rule doesn't matter when interpreting how the rule works?

That doesn't make sense. Then why are the Fairmark.com articles on wash sales littered with references to the whole point: to prevent investors from claiming a loss for selling while staying invested in the same security?

Under your interpretation, what would stop someone from doing exactly that?

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

Does it make sense to you that that would be allowed?
Why would these not considered replacement shares?

Because of wash sale adjustment, 100 out of 200 shares have
- different holding period
-different cost basis

Even though they were bought together.

If there was no wash sale adjustment, these shares were
- bought in the same lot
- same holding period
- same cost basis

So they would not be replacement shares.
Under the regs, they are. But under rev rul 56-602, the shares from the same lot cannot be used to wash the shares from the same lot. I’m pretty sure we’ve quoted that extensively by now.
Doesn’t this rule refer to the “simple case” where shares in the same lot has not been adjusted already? I think context of this rule is also important.

In the above example, stock exposure remains the same so loss should be disallowed, which is the intent behind wash sale.
I know of no case law one way or the other.
I am surprised nobody has mentioned step transactions doctrine regarding this :happy
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

investlikebogle wrote: Wed Jan 12, 2022 10:57 pm
Lee_WSP wrote: Wed Jan 12, 2022 10:44 pm
investlikebogle wrote: Wed Jan 12, 2022 10:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 9:30 pm
investlikebogle wrote: Wed Jan 12, 2022 9:26 pm

Why would these not considered replacement shares?

Because of wash sale adjustment, 100 out of 200 shares have
- different holding period
-different cost basis

Even though they were bought together.

If there was no wash sale adjustment, these shares were
- bought in the same lot
- same holding period
- same cost basis

So they would not be replacement shares.
Under the regs, they are. But under rev rul 56-602, the shares from the same lot cannot be used to wash the shares from the same lot. I’m pretty sure we’ve quoted that extensively by now.
Doesn’t this rule refer to the “simple case” where shares in the same lot has not been adjusted already? I think context of this rule is also important.

In the above example, stock exposure remains the same so loss should be disallowed, which is the intent behind wash sale.
I know of no case law one way or the other.
I am surprised nobody has mentioned step transactions doctrine regarding this :happy
I’ve thought of it, but the service has so far not cared enough or people caught doing it not thought it worth it to take it to the tax court.

It’s really not exactly an issue for a bona fide reduction in position size.

I think if the service wanted to crack down, they already have the means to do so. The idea that you can choose which lots are either sold or whose lots the basis adjustment affects is not supported by any regs or caselaw I’ve read. So, unlike the backdoor, I don’t actually think it is supported by the law.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

Lee_WSP wrote: Wed Jan 12, 2022 11:01 pm I think if the service wanted to crack down, they already have the means to do so. The idea that you can choose which lots are either sold or whose lots the basis adjustment affects is not supported by any regs or caselaw I’ve read. So, unlike the backdoor, I don’t actually think it is supported by the law.
Choosing which lots are being sold can be accomplished using specific share identification. What is not clear is what happens when using First-In First-Out (FIFO). In general, how is FIFO applied when shares acquired at the same time do not all have the same per share basis.

Something that is not covered are details about applying the following sentence in the regulations when the number of matched shares acquired at the same time exceeds the number of shares to be matched.
The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

FactualFran wrote: Thu Jan 13, 2022 11:34 am
Lee_WSP wrote: Wed Jan 12, 2022 11:01 pm I think if the service wanted to crack down, they already have the means to do so. The idea that you can choose which lots are either sold or whose lots the basis adjustment affects is not supported by any regs or caselaw I’ve read. So, unlike the backdoor, I don’t actually think it is supported by the law.
Choosing which lots are being sold can be accomplished using specific share identification. What is not clear is what happens when using First-In First-Out (FIFO). In general, how is FIFO applied when shares acquired at the same time do not all have the same per share basis.

Something that is not covered are details about applying the following sentence in the regulations when the number of matched shares acquired at the same time exceeds the number of shares to be matched.
The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
Yes, that's my point. The spec ID is a broker specific feature. That they tell us which shares are washed is a nice feature, but it is not definitive.

I do not have an answer or position on this one other than "if you want to be safe, don't do it".
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

FactualFran wrote: Thu Jan 13, 2022 11:34 am
Lee_WSP wrote: Wed Jan 12, 2022 11:01 pm I think if the service wanted to crack down, they already have the means to do so. The idea that you can choose which lots are either sold or whose lots the basis adjustment affects is not supported by any regs or caselaw I’ve read. So, unlike the backdoor, I don’t actually think it is supported by the law.
Choosing which lots are being sold can be accomplished using specific share identification. What is not clear is what happens when using First-In First-Out (FIFO). In general, how is FIFO applied when shares acquired at the same time do not all have the same per share basis.

Something that is not covered are details about applying the following sentence in the regulations when the number of matched shares acquired at the same time exceeds the number of shares to be matched.
The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
This is very helpful in that regard:

Wash Sale Matching Rules

Also, because the prescribed order is chronological, it makes more sense to me, intuitively, that the holding period adjustment would be more relevant than the cost basis adjustment.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

iceport wrote: Thu Jan 13, 2022 12:36 pm
FactualFran wrote: Thu Jan 13, 2022 11:34 am Something that is not covered are details about applying the following sentence in the regulations when the number of matched shares acquired at the same time exceeds the number of shares to be matched.
The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
This is very helpful in that regard:

Wash Sale Matching Rules
There is nothing there about when the number of matchable shares acquired at the same time exceeds the number of shares to be matched. The Excess Replacement Shares example has the number of shares acquired by the purchases being equal to the number of shares sold. Examples in the regulations are similar: for each purchase lot either all shares or no shares are treated as replacement shares.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

FactualFran wrote: Thu Jan 13, 2022 7:53 pm
iceport wrote: Thu Jan 13, 2022 12:36 pm
FactualFran wrote: Thu Jan 13, 2022 11:34 am Something that is not covered are details about applying the following sentence in the regulations when the number of matched shares acquired at the same time exceeds the number of shares to be matched.
The stock or securities sold or otherwise disposed of will be matched with an equal number of the shares of stock or securities acquired in accordance with the order of acquisition (beginning with the earliest acquisition) of the stock or securities acquired.
This is very helpful in that regard:

Wash Sale Matching Rules
There is nothing there about when the number of matchable shares acquired at the same time exceeds the number of shares to be matched. The Excess Replacement Shares example has the number of shares acquired by the purchases being equal to the number of shares sold. Examples in the regulations are similar: for each purchase lot either all shares or no shares are treated as replacement shares.
Are you referring to Examples 1 and 2 under the heading, "More or less stock bought than sold," starting on P. 56 of Pub. 550? They give an example of each, but not one that involves only part of a replacement stock tax lot, if that's what your question is about.

The idea is to just keep matching shares until you either run out of wash shares sold, or replacement shares bought in the wash sale period. If you run out of shares sold at a loss before an entire lot of replacement shares is "used up" in the matching process, then some of the shares of the original tax lot will have their cost bases and holding periods adjusted, and some of them will keep their original cost bases and holding periods.

I'm not sure if that's what your question is about or not.

The question I've had throughout this thread is whether in this circumstance the cost basis and holding period adjustments of only part of a single tax lot cause the adjusted shares to be treated as a different tax lot from the unadjusted shares when applying Rev. Rul. 56-602. It makes sense to me that they would be treated differently, or should be, but I'm not aware of any definitive guidance on this specific question.


Reasonable arguments could be made for interpreting the rule either way. Unfortunately, that's not a rare thing. However, one interpretation produces results that are completely consistent with the intent of the rule, and the other interpretation leads to results that are blatantly inconsistent with the intent. In deciding which interpretation to use, I tend to think about it this way: I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law while having acted in strict conformance with the spirit of the law, than discussing how I blatantly violated the spirit of the law while trying to justify it by arguing that a loophole exists in the letter of the law.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

If you're referring to the "backdoor wash", I have seen no binding authority blessing it. I believe it is a quirk of the brokerage reporting in that the shares of one lot cannot wash shares of the same lot, and you can seelct to sell the shares the brokerage marked as washed.

The IRS obviously has bigger problems than to deal with this.

It does depend on when the adjustment actually happens. I haven't seen anything which suggests the brokerage's immediate marking as washed is correct.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

iceport wrote: Fri Jan 14, 2022 12:11 am Are you referring to Examples 1 and 2 under the heading, "More or less stock bought than sold," starting on P. 56 of Pub. 550? They give an example of each, but not one that involves only part of a replacement stock tax lot, if that's what your question is about.
I referred to an example in the Fairmark web page that you posted a link to and to examples in the regulations. The examples in IRS Publication 550 are similar. My question was about "when the number of matchable shares acquired at the same time exceeds the number of shares to be matched".
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

FactualFran wrote: Fri Jan 14, 2022 1:59 pm
iceport wrote: Fri Jan 14, 2022 12:11 am Are you referring to Examples 1 and 2 under the heading, "More or less stock bought than sold," starting on P. 56 of Pub. 550? They give an example of each, but not one that involves only part of a replacement stock tax lot, if that's what your question is about.
I referred to an example in the Fairmark web page that you posted a link to and to examples in the regulations. The examples in IRS Publication 550 are similar. My question was about "when the number of matchable shares acquired at the same time exceeds the number of shares to be matched".
Okay, but what is the specific question? Does it relate to how the shares of that lot are ordered, chronologically? Or something else?
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

iceport wrote: Fri Jan 14, 2022 2:19 pm
FactualFran wrote: Fri Jan 14, 2022 1:59 pm
iceport wrote: Fri Jan 14, 2022 12:11 am Are you referring to Examples 1 and 2 under the heading, "More or less stock bought than sold," starting on P. 56 of Pub. 550? They give an example of each, but not one that involves only part of a replacement stock tax lot, if that's what your question is about.
I referred to an example in the Fairmark web page that you posted a link to and to examples in the regulations. The examples in IRS Publication 550 are similar. My question was about "when the number of matchable shares acquired at the same time exceeds the number of shares to be matched".
Okay, but what is the specific question? Does it relate to how the shares of that lot are ordered, chronologically? Or something else?
In a couple of rulings and cases the service has simply disallowed the loss and the basis adjustments under section d of 1091. You probably want to refer to Rev. Ruls. 68-23 and 71-433 for insight, or more confusion.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

iceport wrote: Fri Jan 14, 2022 2:19 pm Okay, but what is the specific question? Does it relate to how the shares of that lot are ordered, chronologically? Or something else?
A few post back in this thread with my question about "when the number of matchable shares acquired at the same time exceeds the number of shares to be matched" also contained:
Choosing which lots are being sold can be accomplished using specific share identification. What is not clear is what happens when using First-In First-Out (FIFO). In general, how is FIFO applied when shares acquired at the same time do not all have the same per share basis.
Being more specific, what are relevant laws, regulations, and rulings about using FIFO it that case?
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

Lee_WSP wrote: Fri Jan 14, 2022 3:07 pm In a couple of rulings and cases the service has simply disallowed the loss and the basis adjustments under section d of 1091. You probably want to refer to Rev. Ruls. 68-23 and 71-433 for insight, or more confusion.
The rulings do not mention section 1091 or wash sales.

Rev. Rul. 68-23 is about two blocks of stocks where each block was acquired in a separate transaction and each block has a different adjusted basis per share.

Rev. Rul. 71-433 is about: "A United States citizen who transfers stock in several corporations to a foreign trust may not, in computing the excise tax under section 1491 of the Code, offset unrealized appreciation in one stock by unrealized depreciation in another stock."

What those rulings have similar to wash sales is that a gain in one block and a loss in another block do not offset.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by investlikebogle »

gobel wrote: Fri Jan 07, 2022 3:29 pm
VartAndelay wrote: Thu Jan 06, 2022 6:59 pm The cost basis at that point would be:
[lot 1: ] 10 shares for $10/share
[lot 2a:] 90 shares for $9/share
[lot 2b:] 110 shares for $4/share
It's actually possible in this example to clear out all the wash sales. The key is that shares cannot trigger wash sales on shares within the same lot.

So on Jan 4, first sell lot 1. This will trigger a wash sale onto lot 2b (2a cannot trigger another wash sale so it is skipped). This leads to

lot 2a: 90 shares for $9/share
lot 2b: 10 shares for $11/share
lot 2c: 100 shares for $4/share

Then sell all of lot 2a and 2b and 85 shares from lot 2c. No further wash sales will be triggered, since these are all shares from the same original lot 2. You are left with realized losses of $705 and

lot 2: 15 shares for $4/share
Lets assume the worst case scenario assuming wash sale will be triggered for lot2a and lot2b.

Assume lot2a and lot2b trigger wash sale. Now lot2c can be split further into two lots:

lot2c-1: 90 shares for $10/share (adding $6 loss)
lot2c-2: 10 shares for $12/share (adding $8 loss)

Now 85 remaining shares are sold. Note that now there are NO replacement shares remaining!!!. All 200 replacement shares have been used. So loss on these 85 shares will be allowed.
Total loss allowed: 85*(10-3) = 595

Finally, you have two lots remaining:
lot2c-1: 5 shares for $10/share
lot2c-2: 10 shares for $12/share
cost basis assuming wash sale = 5*10 + 10*12 = 170

-------------------------------------------------------------------------------------
You can check as follows:
Total buy= 100*10 + 200*4 = $1800
Total sell = 90*5 + 195*3 = 1035
Total loss (assuming FIFO) = 90*5 + 10*7 + 185*1 = $705
Original remaining cost basis (no wash sale) = 15*4 = 60
check: 1035 + 705 + 60 = 1800
--------------------------------------------------

If there was no was sale, you could have claimed a loss of $705 and you will have remaining cost basis of $60

With wash sale, you can only claim a loss of $595. Disallowed loss (705-595=110). But your cost basis has increased by 110 to 170=110+60, which makes sense. Essentially, you can claim the disallowed loss of $110 when you sell remaining shares.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

FactualFran wrote: Fri Jan 14, 2022 8:36 pm
iceport wrote: Fri Jan 14, 2022 2:19 pm Okay, but what is the specific question? Does it relate to how the shares of that lot are ordered, chronologically? Or something else?
A few post back in this thread with my question about "when the number of matchable shares acquired at the same time exceeds the number of shares to be matched" also contained:
Choosing which lots are being sold can be accomplished using specific share identification. What is not clear is what happens when using First-In First-Out (FIFO). In general, how is FIFO applied when shares acquired at the same time do not all have the same per share basis.
Being more specific, what are relevant laws, regulations, and rulings about using FIFO it that case?
The continued reference to different per share costs when asking about FIFO method of share selection is confusing, because FIFO uses the timing of the purchases, not the per share cost basis, to select shares. The cost per share is irrelevant in selecting shares using FIFO.

See the wiki on cost basis methods: Cost basis methods

With FIFO, shares are selected chronologically, in the order in which they were bought. The shares bought first — the oldest shares — are sold first. In a tax lot in which all shares were bought at the same time, it doesn't matter which shares are selected first.

In a tax lot in which some shares have had their holding periods adjusted, those shares with the longest holding periods are selected for sale first. The holding period for each share is the time from the purchase to the sale of the share.

When replacement shares from a wash sale have their holding periods adjusted, the holding periods of the shares sold are added* to the holding periods of the replacement shares they are matched with. So they become "older" shares. And they are selected first using FIFO.

* The text on P. 56 of Pub. 550 is a little ambiguous: "Your holding period for the new stock or securities includes the holding period of the stock or securities sold."


Note that Kaye Thomas has covered this topic at Fairmark.com, also.

FIFO: First-In, First-Out
Use the adjusted acquisition date

In various situations the tax law treats you as having acquired shares on a date that differs from your actual acquisition date.

Partly for this reason [the use of common sense in a preceding example], and partly based on other admittedly weak but supportive authorities, the proper approach is to apply FIFO based on the adjusted acquisition date whenever it differs from the actual acquisition date.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

FactualFran wrote: Fri Jan 14, 2022 8:51 pm
Lee_WSP wrote: Fri Jan 14, 2022 3:07 pm In a couple of rulings and cases the service has simply disallowed the loss and the basis adjustments under section d of 1091. You probably want to refer to Rev. Ruls. 68-23 and 71-433 for insight, or more confusion.
The rulings do not mention section 1091 or wash sales.

Rev. Rul. 68-23 is about two blocks of stocks where each block was acquired in a separate transaction and each block has a different adjusted basis per share.

Rev. Rul. 71-433 is about: "A United States citizen who transfers stock in several corporations to a foreign trust may not, in computing the excise tax under section 1491 of the Code, offset unrealized appreciation in one stock by unrealized depreciation in another stock."

What those rulings have similar to wash sales is that a gain in one block and a loss in another block do not offset.
Or is it, the two blocks don't offset if there is a wash sale that disallows the loss from one block?
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

FactualFran wrote: Fri Jan 14, 2022 8:51 pm
Lee_WSP wrote: Fri Jan 14, 2022 3:07 pm In a couple of rulings and cases the service has simply disallowed the loss and the basis adjustments under section d of 1091. You probably want to refer to Rev. Ruls. 68-23 and 71-433 for insight, or more confusion.
The rulings do not mention section 1091 or wash sales.

Rev. Rul. 68-23 is about two blocks of stocks where each block was acquired in a separate transaction and each block has a different adjusted basis per share.

Rev. Rul. 71-433 is about: "A United States citizen who transfers stock in several corporations to a foreign trust may not, in computing the excise tax under section 1491 of the Code, offset unrealized appreciation in one stock by unrealized depreciation in another stock."

What those rulings have similar to wash sales is that a gain in one block and a loss in another block do not offset.

Sec. 1091 eschews netting. Accordingly, if a gain block and a loss block are sold, and a prohibited reacquisition occurs, the gain is fully recognized and the loss is disallowed (Rev. Rul. 70-231). As is the case in Sec. 356(c) or Sec. 1491, the wash sale rules bifurcate a plan or arrangement and surgically ferrets out losses for disallowances (Rev. Ruls. 68-23 and 71-433).

http://archives.cpajournal.com/old/12826671.htm
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

iceport wrote: Sat Jan 15, 2022 12:33 am With FIFO, shares are selected chronologically, in the order in which they were bought. The shares bought first — the oldest shares — are sold first. In a tax lot in which all shares were bought at the same time, it doesn't matter which shares are selected first.
If it doesn't matter which shares of the same purchase are selected first, then shares with a basis adjusted by a wash sale can be selected first. The result can be that a loss deferred due to a wash sale is realized. Selling some share of a purchase for a loss is not a wash sale with other shares of the same purchase.
iceport wrote: Sat Jan 15, 2022 12:33 am In a tax lot in which some shares have had their holding periods adjusted, those shares with the longest holding periods are selected for sale first. The holding period for each share is the time from the purchase to the sale of the share.
What is the law, regulation, or ruling that indicates that the "shares with the longest holding periods are selected for sale first"? A regulation is: "the stock sold or transferred is charged against the earliest lot the taxpayer purchased or acquired to determine the basis and holding period of the stock". Note that it is the earliest lot purchased, not the lot with the longest holding period.
iceport wrote: Sat Jan 15, 2022 12:33 am When replacement shares from a wash sale have their holding periods adjusted, the holding periods of the shares sold are added* to the holding periods of the replacement shares they are matched with. So they become "older" shares. And they are selected first using FIFO.
What is the law, regulation, or ruling that indicates that a wash sale changes when a share has been purchased or acquired for determining the earliest lot? A wash sale changes the holding period, not the purchase or acquisition date.
iceport wrote: Sat Jan 15, 2022 12:33 amNote that Kaye Thomas has covered this topic at Fairmark.com, also.

FIFO: First-In, First-Out
Use the adjusted acquisition date

In various situations the tax law treats you as having acquired shares on a date that differs from your actual acquisition date.

Partly for this reason [the use of common sense in a preceding example], and partly based on other admittedly weak but supportive authorities, the proper approach is to apply FIFO based on the adjusted acquisition date whenever it differs from the actual acquisition date.
The example giving at Fairmark is a stock split. 100 shares bought two years ago are now 200 shares. 100 shares bought three months ago are now 200 shares. The post-split shares have the acquisition date of the corresponding pre-split shares. The date of the split is not an acquisition date for determining basis.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

rkhusky wrote: Sat Jan 15, 2022 12:04 pm
FactualFran wrote: Fri Jan 14, 2022 8:51 pm What those rulings have similar to wash sales is that a gain in one block and a loss in another block do not offset.
Or is it, the two blocks don't offset if there is a wash sale that disallows the loss from one block?
I must be missing a difference between what I wrote and what your question indicates. Please post an example that shows the difference.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

FactualFran wrote: Sat Jan 15, 2022 4:31 pm
rkhusky wrote: Sat Jan 15, 2022 12:04 pm
FactualFran wrote: Fri Jan 14, 2022 8:51 pm What those rulings have similar to wash sales is that a gain in one block and a loss in another block do not offset.
Or is it, the two blocks don't offset if there is a wash sale that disallows the loss from one block?
I must be missing a difference between what I wrote and what your question indicates. Please post an example that shows the difference.
The wording made it appear that the rulings did not involve a wash sale.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

rkhusky wrote: Sat Jan 15, 2022 7:37 pm The wording made it appear that the rulings did not involve a wash sale.
Neither of the two rulings that Lee_WSP cited, Rev. Ruls. 68-23 and 71-33, involved a wash sale. The cases did not mentioned section 1091 or wash sales. The cases involved multiple blocks of stocks where some blocks had a gain and some blocks had loss. The rulings were that the gains and losses do not offset.

There is a similar rule for wash sales. According to IRS Publication 500: "Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day."
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

Lee_WSP wrote: Sat Jan 15, 2022 1:10 pm Sec. 1091 eschews netting. Accordingly, if a gain block and a loss block are sold, and a prohibited reacquisition occurs, the gain is fully recognized and the loss is disallowed (Rev. Rul. 70-231). As is the case in Sec. 356(c) or Sec. 1491, the wash sale rules bifurcate a plan or arrangement and surgically ferrets out losses for disallowances (Rev. Ruls. 68-23 and 71-433).

http://archives.cpajournal.com/old/12826671.htm
Thank you for the citation to Rev. Rul. 70-231. That ruling involves 300 shares being sold, 250 shares being purchased within 30 days after the sale, and 100 of the shares sold having a loss. It is an example of the number of matched shares of a purchase lot exceeding the number of other shares sold for a loss.

Unfortunately, the ruling does not cover details about the basis adjustment made to the purchase lot of 250 shares and the FIFO treatment of future sales of shares of that purchase lot.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

FactualFran wrote: Sat Jan 15, 2022 9:30 pm
Lee_WSP wrote: Sat Jan 15, 2022 1:10 pm Sec. 1091 eschews netting. Accordingly, if a gain block and a loss block are sold, and a prohibited reacquisition occurs, the gain is fully recognized and the loss is disallowed (Rev. Rul. 70-231). As is the case in Sec. 356(c) or Sec. 1491, the wash sale rules bifurcate a plan or arrangement and surgically ferrets out losses for disallowances (Rev. Ruls. 68-23 and 71-433).

http://archives.cpajournal.com/old/12826671.htm
Thank you for the citation to Rev. Rul. 70-231. That ruling involves 300 shares being sold, 250 shares being purchased within 30 days after the sale, and 100 of the shares sold having a loss. It is an example of the number of matched shares of a purchase lot exceeding the number of other shares sold for a loss.

Unfortunately, the ruling does not cover details about the basis adjustment made to the purchase lot of 250 shares and the FIFO treatment of future sales of shares of that purchase lot.
It was precisely that quote cited from the Robert Willens article that made me think that Rev. Ruls. 68-23 and 71-433 involved a wash sale. Perhaps he referenced those 2 RR because they involve rules that also ferret out losses like the wash sale does.
Last edited by rkhusky on Sat Jan 15, 2022 9:55 pm, edited 1 time in total.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

FactualFran wrote: Sat Jan 15, 2022 8:41 pm There is a similar rule for wash sales. According to IRS Publication 500: "Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day."
Right. If a loss is washed, you can't use it to offset a gain. It's actually puzzling to me why that is called out anyway. It (and the example that follows) seems consistent with the replacement share concept and the procedures we have been talking about.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by grabiner »

rkhusky wrote: Sat Jan 15, 2022 9:42 pm
FactualFran wrote: Sat Jan 15, 2022 8:41 pm There is a similar rule for wash sales. According to IRS Publication 500: "Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day."
Right. If a loss is washed, you can't use it to offset a gain. It's actually puzzling to me why that is called out anyway. It (and the example that follows) seems consistent with the replacement share concept and the procedures we have been talking about.
The reason for this rule may have to do with how you report a sale on Form 8949 (previously schedule D). If you bought 100 shares for $80 and 100 shares for $110, and you sell all 200 shares for $100 (possibly in a single order), and both lots are short-term, you can report this on a single line with purchase date "Various", basis $19,000, and sale price $20,000, for a $1000 capital gain. But if you have a wash sale, you must record the transactions separately as a gain of $2000 and a loss of $1000, because the loss of $1000 is disallowed under the wash sale rule.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

grabiner wrote: Sat Jan 15, 2022 10:12 pm
rkhusky wrote: Sat Jan 15, 2022 9:42 pm
FactualFran wrote: Sat Jan 15, 2022 8:41 pm There is a similar rule for wash sales. According to IRS Publication 500: "Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day."
Right. If a loss is washed, you can't use it to offset a gain. It's actually puzzling to me why that is called out anyway. It (and the example that follows) seems consistent with the replacement share concept and the procedures we have been talking about.
The reason for this rule may have to do with how you report a sale on Form 8949 (previously schedule D). If you bought 100 shares for $80 and 100 shares for $110, and you sell all 200 shares for $100 (possibly in a single order), and both lots are short-term, you can report this on a single line with purchase date "Various", basis $19,000, and sale price $20,000, for a $1000 capital gain. But if you have a wash sale, you must record the transactions separately as a gain of $2000 and a loss of $1000, because the loss of $1000 is disallowed under the wash sale rule.
Fairmark actually has an article about this. The conclusion is that
The only thing you need to know here is that each block of stock must be treated separately in applying the wash sale rule, even if you sell multiple blocks at the same time.
https://fairmark.com/investment-taxatio ... -day-rule/

Perhaps this has relevance to the prior discussion, where part of a lot/block has its basis & holding period adjusted due to a wash sale and so, the brokerage splits the lot/block into multiple lots/blocks. You should treat each lot/block separately in applying the wash sale rule.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

rkhusky wrote: Mon Jan 17, 2022 8:15 am Fairmark actually has an article about this. The conclusion is that
The only thing you need to know here is that each block of stock must be treated separately in applying the wash sale rule, even if you sell multiple blocks at the same time.
https://fairmark.com/investment-taxatio ... -day-rule/

Perhaps this has relevance to the prior discussion, where part of a lot/block has its basis & holding period adjusted due to a wash sale and so, the brokerage splits the lot/block into multiple lots/blocks. You should treat each lot/block separately in applying the wash sale rule.
That makes a great deal of sense, and leads to logical outcomes.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

Based on the new information from the rulings, it is now my opinion that if you buy and sell several lots within the period, the rule is going to disallow the loss and disallow you from offsetting the gains with the losses because of the rule. The section d basis adjustment will not happen because you no longer hold any replacement shares.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

I reread the Fairmark examples. Those of you relying on examples 3-5 should be aware that he concedes the following.

Example 3 is against the services position.

He has no idea how example 4 will play out, I don't disagree with him. Old shares shouldn't trigger the wash. The sold shares are the same as example 2.

He clearly says the example 5 scenario is disallowed via revenue ruling.

He says clearly that these are his feelings on how the rule "should" work. Not on how the service interprets it.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

FactualFran wrote: Sat Jan 15, 2022 4:14 pm
iceport wrote: Sat Jan 15, 2022 12:33 am With FIFO, shares are selected chronologically, in the order in which they were bought. The shares bought first — the oldest shares — are sold first. In a tax lot in which all shares were bought at the same time, it doesn't matter which shares are selected first.
If it doesn't matter which shares of the same purchase are selected first, then shares with a basis adjusted by a wash sale can be selected first. The result can be that a loss deferred due to a wash sale is realized. Selling some share of a purchase for a loss is not a wash sale with other shares of the same purchase.
iceport wrote: Sat Jan 15, 2022 12:33 am In a tax lot in which some shares have had their holding periods adjusted, those shares with the longest holding periods are selected for sale first. The holding period for each share is the time from the purchase to the sale of the share.
What is the law, regulation, or ruling that indicates that the "shares with the longest holding periods are selected for sale first"? A regulation is: "the stock sold or transferred is charged against the earliest lot the taxpayer purchased or acquired to determine the basis and holding period of the stock". Note that it is the earliest lot purchased, not the lot with the longest holding period.
iceport wrote: Sat Jan 15, 2022 12:33 am When replacement shares from a wash sale have their holding periods adjusted, the holding periods of the shares sold are added* to the holding periods of the replacement shares they are matched with. So they become "older" shares. And they are selected first using FIFO.
What is the law, regulation, or ruling that indicates that a wash sale changes when a share has been purchased or acquired for determining the earliest lot? A wash sale changes the holding period, not the purchase or acquisition date.

Longest holding period, earliest acquisition date, oldest — is there a meaningful difference between any of these?

Publication 550 specifies how the holding period is to be measured:
Holding Period

If you sold or traded investment property, you must determine your holding period for the property. Your holding period determines whether any capital gain or loss was a short-term or a long-term capital gain or loss.

Long-term or short-term. If you hold investment property more than 1 year, any capital gain or loss is a long-term capital gain or loss. If you hold the property 1 year or less, any capital gain or loss is a short-term capital gain or loss.

To determine how long you held the investment property, begin counting on the date after the day you acquired the property. The day you disposed of the property is part of your holding period.
Thus, the holding period is determined by measuring the time period starting on (and including) the day after the acquisition date, to and including the sale date.

For the shares that have had their holding period adjusted by a wash sale, what date would you propose to use for the acquisition date, which determines where the counting of days begins?

As I see it, there are three possibilities: 1) the acquisition date of the old shares sold (interpreting the word "include" to indicate an *overlap* in the holding period of the replacement shares with the holding period of the old shares); 2) a date even *earlier* than the acquisition date of the old shares sold (assuming the holding period adjustment is additive, not overlapping); or 3) the acquisition date of the replacement shares.

There could be reasonable arguments made for either 1) or 2), but using 3) doesn't appear to have any justification. Adjusting the holding period effectively adjusts the acquisition date. Kaye Thomas certainly seems to use the phrases "adjusted holding period" and "adjusted acquisition date" interchangeably. You felt comfortable using other Fairmark.com articles for guidance, but seem to resist the explanations offered in the FIFO article.

FactualFran wrote: Sat Jan 15, 2022 4:14 pm
iceport wrote: Sat Jan 15, 2022 12:33 amNote that Kaye Thomas has covered this topic at Fairmark.com, also.

FIFO: First-In, First-Out
Use the adjusted acquisition date

In various situations the tax law treats you as having acquired shares on a date that differs from your actual acquisition date.

Partly for this reason [the use of common sense in a preceding example], and partly based on other admittedly weak but supportive authorities, the proper approach is to apply FIFO based on the adjusted acquisition date whenever it differs from the actual acquisition date.
The example giving at Fairmark is a stock split. 100 shares bought two years ago are now 200 shares. 100 shares bought three months ago are now 200 shares. The post-split shares have the acquisition date of the corresponding pre-split shares. The date of the split is not an acquisition date for determining basis.
Yes, exactly. As was noted right at the top of the section curiously entitled, Use the adjusted acquisition date, "In various situations the tax law treats you as having acquired shares on a date that differs from your actual acquisition date." This was but one example. Similarly, the actual acquisition date of wash sale replacement shares is not to be used as the acquisition date of the replacement shares in applying FIFO.

The holding period adjustment due to a wash sale is tangentially included in one of the proposed rules for breaking an apparent "tie" in the acquisition dates:
A tie that results from an adjustment in the holding period of shares (for example, when the wash sale rule applies) will be broken by looking to the actual acquisition date.
Implicit in that language is the fact that the actual acquisition date is not otherwise relevant for shares with an adjusted holding period, because the adjusted holding period results in an adjusted acquisition date.


The last point that needs to be made is that if you are hoping to find a "law, regulation, or ruling" that explicitly governs every aspect of the wash sale rule, you are destined for disappointment. For many of even the most common points of confusion, there is no clear text governing specific accounting practices. But in my experience in applying the rule to the best of my ability, the use of common sense and a sharp focus on the overall intent of the wash sale rule usually helps a whole lot in making sense of the inadequately defined rules.

I expect that you will not be persuaded by these arguments. So I'll just end with the same idea I offered before: In choosing between two conflicting interpretations of the wash sale rule, I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law while having acted in strict conformance with the spirit of the law, than discussing how I blatantly violated the spirit of the law while trying to justify it by arguing that a loophole exists in the letter of the law. Using that reasoning as a guide, "Wash Sale Laundering" is perched on shaky ground, and I don't expect to see a wiki article spelling out how it's done anytime soon.
Last edited by iceport on Tue Jan 18, 2022 2:12 pm, edited 1 time in total.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by AnEngineer »

iceport wrote: Tue Jan 18, 2022 2:04 pm...In choosing between two conflicting interpretations of the wash sale rule, I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law while having acted in strict conformance with the spirit of the law, than discussing how I blatantly violated the spirit of the law while trying to justify it by arguing that a loophole exists in the letter of the law...
This is awfully close to advocating for breaking the law.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

AnEngineer wrote: Tue Jan 18, 2022 2:11 pm
iceport wrote: Tue Jan 18, 2022 2:04 pm...In choosing between two conflicting interpretations of the wash sale rule, I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law while having acted in strict conformance with the spirit of the law, than discussing how I blatantly violated the spirit of the law while trying to justify it by arguing that a loophole exists in the letter of the law...
This is awfully close to advocating for breaking the law.
Well, it steers me clear of this practice, which I interpret as clearly against the law:

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

If I choose to view the above as a violation of the spirit of the law, and don't claim the loss, what would be the penalty if I was wrong?
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by AnEngineer »

iceport wrote: Tue Jan 18, 2022 2:16 pm
AnEngineer wrote: Tue Jan 18, 2022 2:11 pm
iceport wrote: Tue Jan 18, 2022 2:04 pm...In choosing between two conflicting interpretations of the wash sale rule, I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law while having acted in strict conformance with the spirit of the law, than discussing how I blatantly violated the spirit of the law while trying to justify it by arguing that a loophole exists in the letter of the law...
This is awfully close to advocating for breaking the law.
Well, it steers me clear of this practice, which I interpret as clearly against the law:

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

If I choose to view the above as a violation of the spirit of the law, and don't claim the loss, what would be the penalty if I was wrong?
Oh, I'm not arguing against taking the more conservative position. I was talking about this (more in the abstract case):
iceport wrote: Tue Jan 18, 2022 2:04 pm...I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law...
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

AnEngineer wrote: Tue Jan 18, 2022 2:33 pm
iceport wrote: Tue Jan 18, 2022 2:16 pm
AnEngineer wrote: Tue Jan 18, 2022 2:11 pm
iceport wrote: Tue Jan 18, 2022 2:04 pm...In choosing between two conflicting interpretations of the wash sale rule, I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law while having acted in strict conformance with the spirit of the law, than discussing how I blatantly violated the spirit of the law while trying to justify it by arguing that a loophole exists in the letter of the law...
This is awfully close to advocating for breaking the law.
Well, it steers me clear of this practice, which I interpret as clearly against the law:

Step 1: Sell 100 shares at a loss.
Step 2: Buy 200 shares back again. All Step 1 losses are disallowed, but the losses are added to the cost bases of 100 of the 200 new shares.
Step 3: Sell the 100 shares that were matched with wash shares. Treat those shares as half of the very same lot that you just bought — so there are no replacement shares and there is no wash sale. And so book the full loss from the first sale!!! Retain 100 new shares at the new low share price.
Step 4: Marvel at just how easy it is to render the wash sale rule completely ineffective. :wink:

If I choose to view the above as a violation of the spirit of the law, and don't claim the loss, what would be the penalty if I was wrong?
Oh, I'm not arguing against taking the more conservative position. I was talking about this (more in the abstract case):
iceport wrote: Tue Jan 18, 2022 2:04 pm...I'd rather be sitting at an IRS audit discussing potential deviations from the letter of the law...
Fair enough. But doesn't the same reasoning always hold?* If I comply with what I call the spirit of the law, then presumably whatever I have done has not produced any tax advantage. If my interpretation of the letter of the law was wrong, the worst thing that could happen is that I lost a tax advantage that was theoretically due.

Also, we're only considering here the cases in which there is ambiguity in the wash sale rule, where reasonable arguments could be made for interpreting the rule in different ways.

* Actually, that reasoning doesn't always hold, upon further reflection. I can dream up a scenario in which I claim a loss in conformance with the spirit of the law, but where the letter of the law might suggest, inconclusively, otherwise. But even assuming this to be true, I'd be comfortable taking the risk and arguing my case with the auditors if my actions were consistent with the intent of the wash sale rule.
Last edited by iceport on Tue Jan 18, 2022 2:56 pm, edited 1 time in total.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

The holding period is the date sold minus date acquired.

The profit or loss is the sell price minutes basis.

Either can be adjusted, but it doesn't change when or what they were originally bought for.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by AnEngineer »

iceport wrote: Tue Jan 18, 2022 2:45 pm Fair enough. But doesn't the same reasoning always hold? If I comply with what I call the spirit of the law, then presumably whatever I have done has not produced any tax advantage. If my interpretation of the letter of the law was wrong, the worst thing that could happen is that I lost a tax advantage that was theoretically due.

Also, we're only considering here the cases in which there is ambiguity in the wash sale rule, where reasonable arguments could be made for interpreting the rule in different ways.
Well, it depends. In this particular case, you're saying that you wouldn't take advantage of the letter of the law (setting aside arguments about different interpretations). Basically, you're declining to do something that the law says you can. In another case, it may mean that you'd break the letter of the law to follow the spirit. I wouldn't want to explain to the IRS that I knowingly and deliberately broke the letter of the law, because I thought it wasn't against the spirit.
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