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

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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 »

FactualFran wrote: Mon Jan 10, 2022 9:02 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?
What matters is the text of the law and regulations, whatever the "whole point" is taken to be.

It makes sense to me based on the text of the law, regulations, and what is at Fairmark.com about IRS rulings. Similarly, a backdoor Roth contribution makes sense.
Hmmm... Are you not the slightest bit curious, then, as to why Fairmark.com keeps bringing up irrelevant references to the whole point? Why would Kaye Thomas keep cluttering up his crisp, concise explanations with irrelevant details, like why the wash sale rule exists? And whether a given strategy could be interpreted as trying to circumvent it?

From the very Fairmark.com example you cited, the Selling Half section of the Wash Sales and Replacement Stock web page at Fairmark.com:
Furthermore, although the IRS doesn’t say this, the result shouldn’t change if you gave a single buy order for 200 and your broker happened to execute it by buying two lots of 100 shares each. It’s clear the shares you have left after the sale weren’t bought to replace the shares you sold.
Huh. It seems to matter what the intentions are, according to the text of that example.

Then in the next example, intent — of the wash sale rule and of the investor — is given an even more prominent role in the explanations:
3: Separate Purchases

You buy 100 shares of XYZ in the morning, and decide to buy another 100 shares in the afternoon of the same day. Within 30 days, you sell the morning shares at a loss.

For all we know, the price of this stock dropped between morning and afternoon, and your afternoon purchase is for the purpose of claiming a loss while maintaining your investment. In other words, you may have been trying to get the result the wash sale rule is designed to prevent. So the IRS will probably contend that the wash sale rule applies in this situation.

The result should be different, though, if you gave a single buy order for 200 and your broker happened to execute it by buying two lots of 100 shares each. In this case it’s clear the shares you have left after the sale weren’t bought to replace the shares you sold.
The "whole point" is pretty much the "whole explanation," no?


You are free to keep ignoring the purpose of the wash sale rule, but I honestly think that is misguided and leads to some nonsensical conclusions (like the one above, that would allow one to effectively "launder" a wash sale by simply buying twice as much of the asset as a replacement for what you want to sell at a loss).

:oops:

Without a better rationale for doing anything else, I'm still standing by my accounting method. That treats the last remaining shares in the OP's example as replacement shares with adjusted cost bases.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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I wish people would stop treating the Fairmark article as Canon. He makes a number of unsupported interpretations and it's interspersed with a bunch of his own thoughts on how it's supposed to work.
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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: Tue Jan 11, 2022 1:40 am Hmmm... Are you not the slightest bit curious, then, as to why Fairmark.com keeps bringing up irrelevant references to the whole point? Why would Kaye Thomas keep cluttering up his crisp, concise explanations with irrelevant details, like why the wash sale rule exists? And whether a given strategy could be interpreted as trying to circumvent it?
I don't know why Kaye Thomas would write something. Ask Kaye Thomas.

Interpretations in which the concept of replacement shares overrides what is written in law, regulations, and rulings are questionable. The Not So Old Shares section of the Wash Sales and Replacement Stock web page at Fairmark.com ends with:
My feeling is that the wash sale rule should never apply if the “replacement” shares were bought at the same time as, or earlier than, the shares that were sold. There isn’t any opportunity for abusive tax planning in this situation. But the issue is in doubt because the IRS has issued a ruling that, in my opinion, is erroneous.
I would depend on IRS rulings, although some consider them to be erroneous.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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FactualFran wrote: Tue Jan 11, 2022 11:57 am
iceport wrote: Tue Jan 11, 2022 1:40 am Hmmm... Are you not the slightest bit curious, then, as to why Fairmark.com keeps bringing up irrelevant references to the whole point? Why would Kaye Thomas keep cluttering up his crisp, concise explanations with irrelevant details, like why the wash sale rule exists? And whether a given strategy could be interpreted as trying to circumvent it?
I don't know why Kaye Thomas would write something. Ask Kaye Thomas.
Oh, there's no mystery there, in my opinion, nothing to ponder over. It seems ludicrous to me that anyone would ever claim the intent of a law is irrelevant. It's central to deciphering and implementing the law. I've read no worthwhile interpretation of this confusing law that doesn't delve into the law's intent. None. That's what judges' rulings are based upon in the face of ambiguities, right? That's what General Council's memos refer to. And given the poorly defined intricacies of the law, that's all we are left with to help us figure out whether our actions might fall within the law, or if they might be deemed outside of the law.

As I said, you are free to continue to believe the purpose of the law has no bearing on which strategies could be determined legal and which could, logically, be determined outside the law. But I don't think doing so will ever serve you well. And in my opinion, it makes absolutely no sense. When they talk about justice being blind, this certainly isn't what they mean!
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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: Tue Jan 11, 2022 12:19 pm
FactualFran wrote: Tue Jan 11, 2022 11:57 am
iceport wrote: Tue Jan 11, 2022 1:40 am Hmmm... Are you not the slightest bit curious, then, as to why Fairmark.com keeps bringing up irrelevant references to the whole point? Why would Kaye Thomas keep cluttering up his crisp, concise explanations with irrelevant details, like why the wash sale rule exists? And whether a given strategy could be interpreted as trying to circumvent it?
I don't know why Kaye Thomas would write something. Ask Kaye Thomas.
Oh, there's no mystery there, in my opinion, nothing to ponder over. It seems ludicrous to me that anyone would ever claim the intent of a law is irrelevant. It's central to deciphering and implementing the law. I've read no worthwhile interpretation of this confusing law that doesn't delve into the law's intent. None. That's what judges' rulings are based upon in the face of ambiguities, right? That's what General Council's memos refer to. And given the poorly defined intricacies of the law, that's all we are left with to help us figure out whether our actions might fall within the law, or if they might be deemed outside of the law.

As I said, you are free to continue to believe the purpose of the law has no bearing on which strategies could be determined legal and which could, logically, be determined outside the law. But I don't think doing so will ever serve you well. And in my opinion, it makes absolutely no sense. When they talk about justice being blind, this certainly isn't what they mean!
He’s clearly writing a persuasion piece. AFAIK, it is not cited by practitioners as canon as it’s very clearly contrary to the regs in some parts.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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Lee_WSP wrote: Tue Jan 11, 2022 8:49 am I wish people would stop treating the Fairmark article as Canon. He makes a number of unsupported interpretations and it's interspersed with a bunch of his own thoughts on how it's supposed to work.
Lee_WSP wrote: Tue Jan 11, 2022 12:51 pm He’s clearly writing a persuasion piece. AFAIK, it is not cited by practitioners as canon as it’s very clearly contrary to the regs in some parts.
I hear you, Lee_WSP. As you know, I'm no lawyer, but I think I understand where you are coming from in your reservations. I think it's a bit of an exaggeration to call it a persuasion piece, but it does fill in missing clarity with some logical arguments from a seasoned tax professional.

What I keep coming back to in my mind is this: What's the alternative?

Whether on purpose or by neglect for some other reason, there has never been any reasonable clarification of so many seemingly minor details of the wash sale rule, but they are details that crop up routinely in a multitude of ways. This thread is a prime example! So, in my opinion, the analyses and explanations of knowledgeable authorities like Kaye Thomas are invaluable. If there are other sources who have been willing to stake their professional reputations on the line and publicly interpret the legalities of the wash sale rule, I'd love to know them. I just haven't found anything better than Fairmark.com's interpretations, overall. (I do like Michael Kitces' analysis of the concept of being substantially identical, though. And he does plant his analysis firmly in the intent of the law.)

The numerous points at which Thomas interjects his own logic and reasoning only serve to highlight how many gaps there are in our collective understanding of the law. He doesn't do it where the law is clear, or where rulings have helped to make the law clear.
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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: Tue Jan 11, 2022 1:19 pm
Lee_WSP wrote: Tue Jan 11, 2022 8:49 am I wish people would stop treating the Fairmark article as Canon. He makes a number of unsupported interpretations and it's interspersed with a bunch of his own thoughts on how it's supposed to work.
Lee_WSP wrote: Tue Jan 11, 2022 12:51 pm He’s clearly writing a persuasion piece. AFAIK, it is not cited by practitioners as canon as it’s very clearly contrary to the regs in some parts.
I hear you, Lee_WSP. As you know, I'm no lawyer, but I think I understand where you are coming from in your reservations. I think it's a bit of an exaggeration to call it a persuasion piece, but it does fill in missing clarity with some logical arguments from a seasoned tax professional.

What I keep coming back to in my mind is this: What's the alternative?

Whether on purpose or by neglect for some other reason, there has never been any reasonable clarification of so many seemingly minor details of the wash sale rule, but they are details that crop up routinely in a multitude of ways. This thread is a prime example! So, in my opinion, the analyses and explanations of knowledgeable authorities like Kaye Thomas are invaluable. If there are other sources who have been willing to stake their professional reputations on the line and publicly interpret the legalities of the wash sale rule, I'd love to know them. I just haven't found anything better than Fairmark.com's interpretations, overall. (I do like Michael Kitces' analysis of the concept of being substantially identical, though. And he does plant his analysis firmly in the intent of the law.)

The numerous points at which Thomas interjects his own logic and reasoning only serve to highlight how many gaps there are in our collective understanding of the law. He doesn't do it where the law is clear, or where rulings have helped to make the law clear.
That’s fair. The answer is there are not a lot of good pieces written for the benefit of a non professional. You are quite simply unlikely to ever have to worry about this. The risk of audit is low and for the most part brokerages are supposed to calculate this for you.

Pub 550 is the best source for a consumer friendly explanation. If you can figure it out, going through the instructions and filling out the form is going to be the next best thing to reading the regs yourself. And then obviously, there’s the regs, code, and tax court decisions interpreting various portions of the code.

That said, it is my opinion that the code, the regs, and the examples given in section 2 of the regs are clear enough to be able to understand the rule.

It can even be summarized like this:
Any purchase of substantially identical shares from the ones sold will cause the basis of the substantially identical shares to be adjusted and the section 195 loss to be deferred and temporarily disallowed.

For the record, the code and the regs do not use the word “replacement shares”. I don’t believe any court rulings or PLR’s use the phrase either.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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FactualFran wrote: Mon Jan 10, 2022 9:02 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?

...

Does it make sense to you that that would be allowed?
What matters is the text of the law and regulations, whatever the "whole point" is taken to be.

It makes sense to me based on the text of the law, regulations, and what is at Fairmark.com about IRS rulings. Similarly, a backdoor Roth contribution makes sense.
It occurred to me that the backdoor Roth strategy has it's own wiki article — Backdoor Roth — explaining how one can legally take advantage of a glaring loophole in the Roth IRA contribution rules. If you are so convinced that an equally glaring loophole exists in the wash sale rule, would you consider drafting a Boglehead wiki article explaining for investors in taxable accounts how to take advantage of it? I'm sure hundreds of thousands of investors would be thankful for it.

It could be a wiki page entitled: Wash Sale Laundering: Legally Book a Loss while Staying Invested.

Then, instead of the typical tripe about finding TLH partners and confusing explanations about what "substantially identical" means, you just explain how to do the Wash Sale Two-Step (really a three-step): sell the underwater asset, immediately buy back twice as much of what was sold, then sell the replacement shares that had their cost bases adjusted. Just like magic, no more wash sale!

I'm being facetious. Sorry. But I think this point is valid: If it were as easy as you seem to think it is, why on earth wouldn't it already be common knowledge? After all, booking a loss while staying invested is a main objective of TLH. I've been reading about TLH for years here on this forum, and never once have I come across such a strategy for side-stepping the wash sale rule as the one your reasoning lays out.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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iceport wrote: Mon Jan 10, 2022 2:36 pm 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?
edit: see rev rul 56-602
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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^^^ It's not me that you need to convince... :|
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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

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Lee_WSP wrote: Tue Jan 11, 2022 2:21 pm
iceport wrote: Tue Jan 11, 2022 1:56 pm ^^^ It's not me that you need to convince... :|
:oops:

I see. Fairmark’s example 2 & 3 are just wrong. That’s that. I reiterate my desire that people stop referencing the article.
That's fair enough. You and I don't see completely eye-to-eye on the usefulness of the Fairmark.com articles, but at least we agree that if, at the end of it all, an investor is left holding replacement shares bought within the wash sale period, some kind of wash sale was involved.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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

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iceport wrote: Mon Jan 10, 2022 2:36 pm 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?
FWIW this is exactly how etrade handled it when I executed this. The IRS accepted it, but it was a small amount, so maybe they just didn't bother to complain.

Apparently Rev Rul 56-602 specifies this clearly. Here're some threads where it seems like other people tried testing it out (I didn't read thru them entirely).
search.php?keywords=rev+rul+56-602&term ... mit=Search
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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gobel wrote: Tue Jan 11, 2022 2:58 pm
iceport wrote: Mon Jan 10, 2022 2:36 pm 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?
FWIW this is exactly how etrade handled it when I executed this. The IRS accepted it, but it was a small amount, so maybe they just didn't bother to complain.
That's interesting! Did your case also involve the sale of shares that had had their cost bases and holding periods adjusted by an earlier wash sale?
gobel wrote: Tue Jan 11, 2022 2:58 pm Apparently Rev Rul 56-602 specifies this clearly. Here're some threads where it seems like other people tried testing it out (I didn't read thru them entirely).
search.php?keywords=rev+rul+56-602&term ... mit=Search
Thanks for this! I'm especially interested in reading through these comments carefully:

KayeThomas_CostBasisRegsComments_Feb52010.pdf

Just to clarify, however, the ruling referenced here: Shares Acquired Before Acquisition of Shares Sold, *does not* address the circumstances in this thread. In the OP's case, some of the shares sold have already become entangled in a prior wash sale. And the ruling refers to the concept of a "bona fide sale of securities made to reduce the taxpayer’s holdings." That goes to the need to change one's economic position for a wash sale to be avoided.

In the example I created above, the investor ends up in exactly the same economic position, but with a loss on the books. That's *exactly* the scenario the wash sale rule was created to prevent.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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Lee_WSP wrote: Tue Jan 11, 2022 2:31 pm
iceport wrote: Tue Jan 11, 2022 2:29 pm
Lee_WSP wrote: Tue Jan 11, 2022 2:21 pm
iceport wrote: Tue Jan 11, 2022 1:56 pm ^^^ It's not me that you need to convince... :|
:oops:

I see. Fairmark’s example 2 & 3 are just wrong. That’s that. I reiterate my desire that people stop referencing the article.
That's fair enough. You and I don't see completely eye-to-eye on the usefulness of the Fairmark.com articles, but at least we agree that if, at the end of it all, an investor is left holding replacement shares bought within the wash sale period, some kind of wash sale was involved.
I think it's useful, but when two examples are dead wrong, and the author has some axe to grind with the service, it's of questionable usefulness as an authority.
It appears that Example 2, at least, is correct. It is consistent with Rev. Rul. 56-602, as noted here as a related point, starting at the third paragraph: Shares Acquired Before Acquisition of Shares Sold

The wording of Fairmark.com's Example 2 clearly suggests the existence of such a ruling:
But you probably still feel that the wash sale rule shouldn’t apply here. And the IRS agrees, in the situation where you bought the 200 shares in a single lot.
I wasn't aware of the specific ruling (though I am now, thanks to gobel), but I had no reason to believe the author would intentionally mislead us into thinking there was, if there wasn't.

This is a prime example of why additional context is important in interpreting the wash sale rule. In this case, Rev. Rul. 56-602 is critical additional context that goes beyond a mere reading of the text of the law.

As far as Example 3, well, the language suggests that there is no definitive answer:
So the IRS will probably contend...
You are free to disagree with Kaye Thomas, but his opinion is at least as good as yours where the law is ambiguous.
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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 »

When he doesn't cite his sources, it's not possible to verify the information. I've retracted my comments about same lot sales. I was unaware of 56-602. It's a good carve out.

FTR, I agree with his position, the rule is arbitrary, capricious, and penalizes taxpayers needlessly.
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

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Lee_WSP wrote: Tue Jan 11, 2022 4:02 pm I was unaware of 56-602. It's a good carve out.
So it seems the big outstanding point of confusion (hopefully not contention) here is whether that ruling applies in the case of the OP, or in the contrived example I created. This thread does involve a partial sale of a single tax lot, with all shares purchased at the same time. However, unlike in Ruling 56-602, some of these shares replaced wash shares from a prior wash sale, and their cost bases and holding periods have been adjusted. The ruling does not address this circumstance.

My own logic says that the ruling should not apply, if for no other reason than because the adjusted holding period of the replacement shares make them behave as if they *were not* purchased at the same time as the rest of the original tax lot.

The other overriding common sense reason is that if Ruling 56-602 *did* still apply to my example, everyone would already be doing it and there'd be a wiki article describing the procedure.

In the real world, for all we know, lots of folks *have* been doing this, but the IRS is either too disinterested or too beleaguered to find them. But I highly doubt it would ever be deemed lawful if it were to be formally scrutinized by the IRS, and I certainly wouldn't suggest in response to a question raised here on the forum that the practice is a feasible way around 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 gobel »

iceport wrote: Tue Jan 11, 2022 3:24 pm In the example I created above, the investor ends up in exactly the same economic position, but with a loss on the books. That's *exactly* the scenario the wash sale rule was created to prevent.
Yep, I agree, so I was able to try it out (doesn't mean etrade is right, of course). I sold X shares at a long-term loss and on the same day bought back 2x shares. When those settled, etrade had marked my sale as a wash, broken the buy into 2 lots of X, and adjusted the date and basis on one lot. I sold that one and it did not trigger a 2nd wash sale, so I was left with a realized long-term loss and X shares at a much lower basis.

(Disclaimer: I've never tried this with any significant amount but there's a thread here discussing this, and another recent thread here about buying cheap options to do basically the same thing. My feeling is it's getting into a gray area and what hedge funds with expensive lawyers are willing to do. I just follow the 31 day rule to be safe.)

For OP's question, interpreting 26 CFR § 1.1091-1(e) and RR 56-602 is pretty clear and leads to my calculations on page 1. viewtopic.php?p=6434378#p6434378 However, it does require that OP select and sell the right lots (and for their broker to even allow that). If they just sell the 195 in one batch, it's hard to predict which way the wash flows (eg. I can see the first 10 shares flowing onto part of the other 185 which also got sold, so the results are the same as what I calculated - OR the 10 shares flow onto the 15 that are left behind, leaving a basis of $11 on 10 shares and $4 on 5 shares and only $635 of realized losses).
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

gobel wrote: Tue Jan 11, 2022 4:40 pm
iceport wrote: Tue Jan 11, 2022 3:24 pm In the example I created above, the investor ends up in exactly the same economic position, but with a loss on the books. That's *exactly* the scenario the wash sale rule was created to prevent.
Yep, I agree, so I was able to try it out (doesn't mean etrade is right, of course). I sold X shares at a long-term loss and on the same day bought back 2x shares. When those settled, etrade had marked my sale as a wash, broken the buy into 2 lots of X, and adjusted the date and basis on one lot. I sold that one and it did not trigger a 2nd wash sale, so I was left with a realized long-term loss and X shares at a much lower basis.

(Disclaimer: I've never tried this with any significant amount but there's a thread here discussing this, and another recent thread here about buying cheap options to do basically the same thing. My feeling is it's getting into a gray area and what hedge funds with expensive lawyers are willing to do. I just follow the 31 day rule to be safe.)

For OP's question, interpreting 26 CFR § 1.1091-1(e) and RR 56-602 is pretty clear and leads to my calculations on page 1. viewtopic.php?p=6434378#p6434378 However, it does require that OP select and sell the right lots (and for their broker to even allow that). If they just sell the 195 in one batch, it's hard to predict which way the wash flows (eg. I can see the first 10 shares flowing onto part of the other 185 which also got sold, so the results are the same as what I calculated - OR the 10 shares flow onto the 15 that are left behind, leaving a basis of $11 on 10 shares and $4 on 5 shares and only $635 of realized losses).
Holy cow... just when I thought this situation couldn't possibly get any more confusing! :?

I didn't realize your post on the first page was supported by your broker's actual accounting. I do agree, though, that there's no certainty that etrade is correct. We're all in the same boat trying to make sense of ill-defined rules, etrade included. I wonder if etrade is using RR 56-602 to support their accounting. It doesn't fit, if you ask me.

This all makes me tempted to test it out using a ST bond fund I own at Vanguard. It's all I have with any losses, and I'd be willing to mess around with some of it. Low stakes, all around. Because it's a mutual fund, I'd have to do the 2X buying first, then sell the losing shares, then the adjusted half of the new shares, to get around the frequent trading restriction. But that shouldn't matter. Let me think about this...
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

iceport wrote: Tue Jan 11, 2022 6:15 pm Because it's a mutual fund, I'd have to do the 2X buying first, then sell the losing shares, then the adjusted half of the new shares, to get around the frequent trading restriction.
You can get around the frequent trading restriction with a scheduled transaction.
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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: Tue Jan 11, 2022 6:15 pm
gobel wrote: Tue Jan 11, 2022 4:40 pm
iceport wrote: Tue Jan 11, 2022 3:24 pm In the example I created above, the investor ends up in exactly the same economic position, but with a loss on the books. That's *exactly* the scenario the wash sale rule was created to prevent.
Yep, I agree, so I was able to try it out (doesn't mean etrade is right, of course). I sold X shares at a long-term loss and on the same day bought back 2x shares. When those settled, etrade had marked my sale as a wash, broken the buy into 2 lots of X, and adjusted the date and basis on one lot. I sold that one and it did not trigger a 2nd wash sale, so I was left with a realized long-term loss and X shares at a much lower basis.

(Disclaimer: I've never tried this with any significant amount but there's a thread here discussing this, and another recent thread here about buying cheap options to do basically the same thing. My feeling is it's getting into a gray area and what hedge funds with expensive lawyers are willing to do. I just follow the 31 day rule to be safe.)

For OP's question, interpreting 26 CFR § 1.1091-1(e) and RR 56-602 is pretty clear and leads to my calculations on page 1. viewtopic.php?p=6434378#p6434378 However, it does require that OP select and sell the right lots (and for their broker to even allow that). If they just sell the 195 in one batch, it's hard to predict which way the wash flows (eg. I can see the first 10 shares flowing onto part of the other 185 which also got sold, so the results are the same as what I calculated - OR the 10 shares flow onto the 15 that are left behind, leaving a basis of $11 on 10 shares and $4 on 5 shares and only $635 of realized losses).
Holy cow... just when I thought this situation couldn't possibly get any more confusing! :?

I didn't realize your post on the first page was supported by your broker's actual accounting. I do agree, though, that there's no certainty that etrade is correct. We're all in the same boat trying to make sense of ill-defined rules, etrade included. I wonder if etrade is using RR 56-602 to support their accounting. It doesn't fit, if you ask me.

This all makes me tempted to test it out using a ST bond fund I own at Vanguard. It's all I have with any losses, and I'd be willing to mess around with some of it. Low stakes, all around. Because it's a mutual fund, I'd have to do the 2X buying first, then sell the losing shares, then the adjusted half of the new shares, to get around the frequent trading restriction. But that shouldn't matter. Let me think about this...
56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
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Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
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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 »

rkhusky wrote: Wed Jan 12, 2022 9:08 am
Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
Regardless of any holding period or basis adjustments the shares were still purchased in one lot at the same point in time.
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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 9:10 am
rkhusky wrote: Wed Jan 12, 2022 9:08 am
Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
Regardless of any holding period or basis adjustments the shares were still purchased in one lot at the same point in time.
What is the source for that text? Is it RR 56-602, or an interpretation? (Are there any words missing in that quoted passage?)
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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 9:20 am
Lee_WSP wrote: Wed Jan 12, 2022 9:10 am
rkhusky wrote: Wed Jan 12, 2022 9:08 am
Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
Regardless of any holding period or basis adjustments the shares were still purchased in one lot at the same point in time.
What is the source for that text? Is it RR 56-602, or an interpretation? (Are there any words missing in that quoted passage?)
It’s the relevant and binding part of the ruling. The rest talks about legislative intent, but it’s dicta. But does explain why fairmark continually harps about 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 »

rkhusky wrote: Tue Jan 11, 2022 6:48 pm
iceport wrote: Tue Jan 11, 2022 6:15 pm Because it's a mutual fund, I'd have to do the 2X buying first, then sell the losing shares, then the adjusted half of the new shares, to get around the frequent trading restriction.
You can get around the frequent trading restriction with a scheduled transaction.
So should I take that as a suggestion from an interested party? :)

I could try that, but I haven't done that trick before, and I've never tried scheduled transactions on the new brokerage platform. Does it still work on that?

The thing is, it shouldn't be required, right? As long as the losing shares are sold first, creating the first guaranteed wash sale, and the newer shares from the 2X lot are sold second, it shouldn't matter whether the 2X lot is bought before of after the first sale of the losing shares. Isn't that true?
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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 9:28 am
rkhusky wrote: Tue Jan 11, 2022 6:48 pm
iceport wrote: Tue Jan 11, 2022 6:15 pm Because it's a mutual fund, I'd have to do the 2X buying first, then sell the losing shares, then the adjusted half of the new shares, to get around the frequent trading restriction.
You can get around the frequent trading restriction with a scheduled transaction.
So should I take that as a suggestion from an interested party? :)

I could try that, but I haven't done that trick before, and I've never tried scheduled transactions on the new brokerage platform. Does it still work on that?

The thing is, it shouldn't be required, right? As long as the losing shares are sold first, creating the first guaranteed wash sale, and the newer shares from the 2X lot are sold second, it shouldn't matter whether the 2X lot is bought before of after the first sale of the losing shares. Isn't that true?
While that makes intuitive sense, nothing in the regs or revenue ruling 56 says that previously sold shares are disregarded. But if they aren’t their basis is simply adjusted and you arrive at the same result anyway.
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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 9:27 am
iceport wrote: Wed Jan 12, 2022 9:20 am
Lee_WSP wrote: Wed Jan 12, 2022 9:10 am
rkhusky wrote: Wed Jan 12, 2022 9:08 am
Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.

But is it the same lot, or did the wash sale adjustment split the shares into two lots?
Regardless of any holding period or basis adjustments the shares were still purchased in one lot at the same point in time.
What is the source for that text? Is it RR 56-602, or an interpretation? (Are there any words missing in that quoted passage?)
It’s the relevant and binding part of the ruling. The rest talks about legislative intent, but it’s dicta. But does explain why fairmark continually harps about it.
The wording of the first sentence is unusually awkward, even for legalese. It's almost like there are two sentences spliced together with some words missing.
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 the sale will not be disallowed by 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 9:36 am
Lee_WSP wrote: Wed Jan 12, 2022 9:27 am
iceport wrote: Wed Jan 12, 2022 9:20 am
Lee_WSP wrote: Wed Jan 12, 2022 9:10 am
rkhusky wrote: Wed Jan 12, 2022 9:08 am
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
Regardless of any holding period or basis adjustments the shares were still purchased in one lot at the same point in time.
What is the source for that text? Is it RR 56-602, or an interpretation? (Are there any words missing in that quoted passage?)
It’s the relevant and binding part of the ruling. The rest talks about legislative intent, but it’s dicta. But does explain why fairmark continually harps about it.
The wording of the first sentence is unusually awkward, even for legalese. It's almost like there are two sentences spliced together with some words missing.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold.
*shrug*

That's how it's been transcribed. It's a more than fifty year old ruling and likely typed on paper. Digital transcription is a relatively recent phenomena. It may have been an optical scan + a cursory review by human editors.

I'd assume it's supposed to say "section 1091," or "the section,".
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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 9:46 am That's how it's been transcribed. It's a more than fifty year old ruling and likely typed on paper. Digital transcription is a relatively recent phenomena. It may have been an optical scan + a cursory review by human editors.

I'd assume it's supposed to say "section 1091," or "the section,".
Is there any way you could provide a link to the text?
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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 12:12 pm
Lee_WSP wrote: Wed Jan 12, 2022 9:46 am That's how it's been transcribed. It's a more than fifty year old ruling and likely typed on paper. Digital transcription is a relatively recent phenomena. It may have been an optical scan + a cursory review by human editors.

I'd assume it's supposed to say "section 1091," or "the section,".
Is there any way you could provide a link to the text?
I was unable to find a public source. I can probably email a copy. DM me if you're interested.
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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 12:27 pm
iceport wrote: Wed Jan 12, 2022 12:12 pm
Lee_WSP wrote: Wed Jan 12, 2022 9:46 am That's how it's been transcribed. It's a more than fifty year old ruling and likely typed on paper. Digital transcription is a relatively recent phenomena. It may have been an optical scan + a cursory review by human editors.

I'd assume it's supposed to say "section 1091," or "the section,".
Is there any way you could provide a link to the text?
I was unable to find a public source. I can probably email a copy. DM me if you're interested.
I found more of the sentence intact from this source: Wash Sale Computations May Vary from Broker to Broker

The sentence below makes a heckuva lot more sense than the discombobulated version:
In Revenue Ruling 56-602, the IRS 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 merely because the taxpayer acquired in the original purchase more shares than he later sold.”
Though I'm no lawyer, if you ask me, that little phrase, "merely because" is a potential monkey wrench in the Wash Sale Laundering scheme.

What if there is more reason to disallow the loss than "merely" buying more shares than were later sold?

What if the shares sold in question had replaced wash shares from an earlier wash sale, and were storing those losses in adjusted cost bases? Then, it seems, there would be an additional reason to disallow the loss — and one that makes perfect logical sense! It would be no great leap, with that additional context, to view the purchase of the entire lot and subsequent sale of only part of it as an attempt to realize the losses on shares sold earlier while replacing those shares, maintaining the earlier economic position — thus violating the central purpose of the wash sale rule.

The full ruling can be viewed in Google book preview of Internal Revenue Bulletin, Issues 28-29; Issues 41-53:

https://books.google.com/books?id=TlxsA ... &q&f=false



I also found it interesting that the briefing highlights how brokers are basically in the same position as the rest of us: trying their best to make sense of a hopelessly murky rule, with no definitive answers,
Historically, broker reporting of wash sales was an accommodation and not a legal requirement. As such, the reporting was often limited in the scope of securities covered and its accuracy was the subject of a disclaimer.

Now that brokers are legally required to report wash sale information for covered securities, questions have arisen as to just what is “accurate” under Code Section 1091, and the regulations promulgated thereunder. Issues have arisen as to what actually constitutes a wash sale and what shares can be considered replacement shares. With many market participants believing there are no clear answers to these questions, brokers are faced with the difficult choice of interpreting IRS regulations in a manner that may favor the taxpayer over the IRS, or vice versa, while their legal reporting obligation is simply to apply the Wash Sale rule correctly.
Based on gobel's experience, it would seem etrade comes down firmly on the side of their tax-paying clients...
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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: Wed Jan 12, 2022 9:08 am
Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
The example is one where there is no disallowed loss. There is no wash sale adjustment. With the purchase lot of 200 shares, 100 shares were sold, 100 shares remain without their basis adjusted because of a disallowed loss.
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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: Wed Jan 12, 2022 2:22 pm
rkhusky wrote: Wed Jan 12, 2022 9:08 am
Lee_WSP wrote: Tue Jan 11, 2022 7:29 pm 56-602 specifically says that unsold shares from the same lot will not trigger the rule. Taxpayers may rely on this proclamation unless rescinded. That's where Fairmark gets it's authority for example two.
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold. For example, a taxpayer acquires 200 shares of the only outstanding stock of a corporation. Less than 30 days after its acquisition, he sells 100 of these shares at a loss. The loss will not be disallowed unless during the period prescribed in section 1091(a) of the Code, he acquires, or enters into a contract or option to acquire, additional shares or securities which are substantially identical to those sold.
Rev. Rul. 56-602 (IRS Revenue Rulings)
But is it the same lot, or did the wash sale adjustment split the shares into two lots?
The example is one where there is no disallowed loss. There is no wash sale adjustment. With the purchase lot of 200 shares, 100 shares were sold, 100 shares remain without their basis adjusted because of a disallowed loss.
But did the shares sold have adjusted cost bases and holding periods?

In the example, they clearly didn't.

In the scenarios explored in this thread, they do.

That is a major difference.
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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 »

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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 2:46 pm
iceport wrote: Wed Jan 12, 2022 1:44 pm
Lee_WSP wrote: Wed Jan 12, 2022 12:27 pm
iceport wrote: Wed Jan 12, 2022 12:12 pm
Lee_WSP wrote: Wed Jan 12, 2022 9:46 am That's how it's been transcribed. It's a more than fifty year old ruling and likely typed on paper. Digital transcription is a relatively recent phenomena. It may have been an optical scan + a cursory review by human editors.

I'd assume it's supposed to say "section 1091," or "the section,".
Is there any way you could provide a link to the text?
I was unable to find a public source. I can probably email a copy. DM me if you're interested.
I found more of the sentence intact from this source: Wash Sale Computations May Vary from Broker to Broker

The sentence below makes a heckuva lot more sense than the discombobulated version:
In Revenue Ruling 56-602, the IRS 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 merely because the taxpayer acquired in the original purchase more shares than he later sold.”
Though I'm no lawyer, if you ask me, that little phrase, "merely because" is a potential monkey wrench in the Wash Sale Laundering scheme.

What if there is more reason to disallow the loss than "merely" buying more shares than were later sold?

What if the shares sold in question had replaced wash shares from an earlier wash sale, and were storing those losses in adjusted cost bases? Then, it seems, there would be an additional reason to disallow the loss — and one that makes perfect logical sense! It would be no great leap, with that additional context, to view the purchase of the entire lot and subsequent sale of only part of it as an attempt to realize the losses on shares sold earlier while replacing those shares, maintaining the earlier economic position — thus violating the central purpose of the wash sale rule.

The full ruling can be viewed in Google book preview of Internal Revenue Bulletin, Issues 28-29; Issues 41-53:

https://books.google.com/books?id=TlxsA ... &q&f=false



I also found it interesting that the briefing highlights how brokers are basically in the same position as the rest of us: trying their best to make sense of a hopelessly murky rule, with no definitive answers,
Historically, broker reporting of wash sales was an accommodation and not a legal requirement. As such, the reporting was often limited in the scope of securities covered and its accuracy was the subject of a disclaimer.

Now that brokers are legally required to report wash sale information for covered securities, questions have arisen as to just what is “accurate” under Code Section 1091, and the regulations promulgated thereunder. Issues have arisen as to what actually constitutes a wash sale and what shares can be considered replacement shares. With many market participants believing there are no clear answers to these questions, brokers are faced with the difficult choice of interpreting IRS regulations in a manner that may favor the taxpayer over the IRS, or vice versa, while their legal reporting obligation is simply to apply the Wash Sale rule correctly.
Based on gobel's experience, it would seem etrade comes down firmly on the side of their tax-paying clients...
Yeah, that's not the ruling at all. Do not rely on that.
Huh??? :confused :confused

Is this not the ruling, with an intelligible first sentence of the last paragraph — including the "merely because" phrase — straight from the Internal Revenue Bulletin?

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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'm following too many threads.

Yes, that's the ruling and it's more or less as it was transcribed by the service I pulled it from. The actual PDF says the same thing as I quoted.

What exactly is the confusion or question?
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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 3:16 pm I'm following too many threads.

Yes, that's the ruling and it's more or less as it was transcribed by the service I pulled it from. The actual PDF says the same thing as I quoted.
I'm sorry, but these two quotes do *not* read the same, to me...

Your version (which is missing some words and duplicating others):
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 the sale will not be disallowed by taxpayer acquired in the original purchase more shares than he later sold.
The actual text:
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 merely because the taxpayer acquired in the original purchase more shares than he later sold.


Lee_WSP wrote: Wed Jan 12, 2022 3:16 pm What exactly is the confusion or question?
First, that you said the ruling wasn't the ruling, and then that you claim an incorrectly cut-and-pasted excerpt is the same as the correct one. That's all.
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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 see it now. Looks like the ocr read the sale disallowed line twice.

Nevertheless, it doesn't substantially change anything.

Edit
Namely that shares from the same lot do not wash shares from the same lot.
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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 3:29 pm I see it now. Looks like the ocr read the sale disallowed line twice.

Nevertheless, it doesn't substantially change anything.
So the "merely because" qualifier is meaningless, legally?
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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 3:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:29 pm I see it now. Looks like the ocr read the sale disallowed line twice.

Nevertheless, it doesn't substantially change anything.
So the "merely because" qualifier is meaningless, legally?
Pretty much. They already said that shares from the same lot do not apply the wash sale rule. The merely because is dicta, ie it’s just their reasoning behind the rule. The only rule expressed is that shares from the same lot will not trigger the 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 iceport »

Lee_WSP wrote: Wed Jan 12, 2022 3:46 pm
iceport wrote: Wed Jan 12, 2022 3:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:29 pm I see it now. Looks like the ocr read the sale disallowed line twice.

Nevertheless, it doesn't substantially change anything.
So the "merely because" qualifier is meaningless, legally?
Pretty much. They already said that shares from the same lot do not apply the wash sale rule. The merely because is dicta, ie it’s just their reasoning behind the rule. The only rule expressed is that shares from the same lot will not trigger the wash sale.
Well, as I read it, it means there could very well be *some other reason* for disallowing the loss, besides the fact that there are just leftover shares from a single tax lot.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
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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 3:50 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:46 pm
iceport wrote: Wed Jan 12, 2022 3:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:29 pm I see it now. Looks like the ocr read the sale disallowed line twice.

Nevertheless, it doesn't substantially change anything.
So the "merely because" qualifier is meaningless, legally?
Pretty much. They already said that shares from the same lot do not apply the wash sale rule. The merely because is dicta, ie it’s just their reasoning behind the rule. The only rule expressed is that shares from the same lot will not trigger the wash sale.
Well, as I read it, it means there could very well be *some other reason* for disallowing the loss, besides the fact that there are just leftover shares from a single tax lot.
The some other reason would have to be other than section 1091. Which is entirely possible and beyond my knowledge.

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.
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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 3:52 pm
iceport wrote: Wed Jan 12, 2022 3:50 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:46 pm
iceport wrote: Wed Jan 12, 2022 3:32 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:29 pm I see it now. Looks like the ocr read the sale disallowed line twice.

Nevertheless, it doesn't substantially change anything.
So the "merely because" qualifier is meaningless, legally?
Pretty much. They already said that shares from the same lot do not apply the wash sale rule. The merely because is dicta, ie it’s just their reasoning behind the rule. The only rule expressed is that shares from the same lot will not trigger the wash sale.
Well, as I read it, it means there could very well be *some other reason* for disallowing the loss, besides the fact that there are just leftover shares from a single tax lot.
The some other reason would have to be other than section 1091.
Why is that? Why couldn't the fact that the very purchase of the lot in question created a wash sale of its own be an additional reason for disallowing the loss? After all, it's quite possible the only reason there is any loss at all on the shares with the adjusted cost bases is because they created a prior wash sale and their cost bases were adjusted upwards!

What's that legal term, "... all the facts and circumstances..." ?
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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 4:06 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:52 pm
iceport wrote: Wed Jan 12, 2022 3:50 pm
Lee_WSP wrote: Wed Jan 12, 2022 3:46 pm
iceport wrote: Wed Jan 12, 2022 3:32 pm

So the "merely because" qualifier is meaningless, legally?
Pretty much. They already said that shares from the same lot do not apply the wash sale rule. The merely because is dicta, ie it’s just their reasoning behind the rule. The only rule expressed is that shares from the same lot will not trigger the wash sale.
Well, as I read it, it means there could very well be *some other reason* for disallowing the loss, besides the fact that there are just leftover shares from a single tax lot.
The some other reason would have to be other than section 1091.
Why is that? Why couldn't the fact that the very purchase of the lot in question created a wash sale of its own be an additional reason for disallowing the loss? After all, it's quite possible the only reason there is any loss at all on the shares with the adjusted cost bases is because they created a prior wash sale and their cost bases were adjusted upwards!

What's that legal term, "... all the facts and circumstances..." ?
Because that's what the ruling says.

The loss will not be disallowed by section 1091 merely because they're from the same lot.
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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 4:27 pm Because that's what the ruling says.
This is going nowhere.

Do you really think these two excerpts are identical in meaning???
...the sale will not be disallowed by reason of the provisions of section 1091 of the Code because the taxpayer acquired in the original purchase more shares than he later sold.
the sale will not be disallowed by reason of the provisions of section 1091 of the Code merely 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 4:29 pm
Lee_WSP wrote: Wed Jan 12, 2022 4:27 pm Because that's what the ruling says.
This is going nowhere.
I really don't understand your confusion. The ruling only references shares bought and retained from the same lot.
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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 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:
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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 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.

You may, of course, use the rev rul as persuasion for the tax court to adopt the position you take (ie shares that were previously sold should not trigger the sale), but the tax court is not obligated to accept your reasoning. But I'd say you have a 50/50 shot at it. So far as I know, no one's bothered to bring it up, and the service rarely audits these unless it's a perfectly clear violation.
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