Why do I have a wash sale disallowance?

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anonymoustycoon
Posts: 7
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Why do I have a wash sale disallowance?

Post by anonymoustycoon »

Hi! I have a very specific question about wash sale rules. I'm trying to figure out why I have a wash sale disallowance on some trades that my investment advisory firm placed for me. Here's a list of tax lots for the stock (S - Sprint) as reported by my brokerage firm:

Code: Select all

Quantity  Opening Date  Opening Cost($)  Closing Date  Closing Cost($)  Disallowance($)
74.00     9/20/2017     594.20           11/30/2017    445.81           0.00
136.00    9/22/2017     1,158.24         11/30/2017    819.33           -157.00
63.00     11/16/2017    550.75           11/30/2017    379.54           0.00
As far as I understand, the only wash sale-related event involves the third lot, bought on 11/16 and sold on 11/30. Why is there a $157 wash sale disallowance on that second lot opened on 09/22? Note that I did not buy the stock again until 2018, definitely more than 30 days after selling my position on 11/30/2017.

Also, please correct me if I'm wrong: the $157 disallowance is the amount of realized losses I cannot use to offset realized gains (or deduct from my income) in 2017, although I can use it to increase my cost-basis when I buy Sprint again in 2018. Do I have it right?

If you need more information or are just wondering why the heck I'm trying to figure this out, let me know! :)
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archbish99
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Re: Why do I have a wash sale disallowance?

Post by archbish99 »

This is an odd one where a computer looking at each lot and a human looking at the whole transaction piece things together differently. Your second lot created a wash sale because you'd purchased other shares of the same security within 30 days before or after -- which would be the third lot. You look at this and say it doesn't apply, because you sold everything at once; a computer looks at that and says the lots are treated separately, and you have a wash sale.

However, that basis isn't actually lost -- it passes to the "substitute" shares, which would be the third lot, which you have also sold, so the outcome is the same in either way of looking at it. The question you'll need to answer from records is whether your brokerage has already done the math to add the increased basis (your disallowed loss on the second lot) into the third lot, or if you'll need to report that as an adjustment on your tax return. My guess is that they have -- looks like whatever stock this was sold for $6.02/share, so I'm guessing you didn't pay $8.74/share just two weeks earlier. (If you did, my condolences.)

EDIT: No, I just checked Sprint's price history, you wouldn't have paid $8.74/share in mid-November. They've already rolled the disallowed amount into your basis in the third lot.
I'm not a financial advisor, I just play one on the Internet.
dbr
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Re: Why do I have a wash sale disallowance?

Post by dbr »

archbish99 wrote: Mon Jun 04, 2018 1:23 am This is an odd one where a computer looking at each lot and a human looking at the whole transaction piece things together differently. Your second lot created a wash sale because you'd purchased other shares of the same security within 30 days before or after -- which would be the third lot. You look at this and say it doesn't apply, because you sold everything at once; a computer looks at that and says the lots are treated separately, and you have a wash sale.

However, that basis isn't actually lost -- it passes to the "substitute" shares, which would be the third lot, which you have also sold, so the outcome is the same in either way of looking at it. The question you'll need to answer from records is whether your brokerage has already done the math to add the increased basis (your disallowed loss on the second lot) into the third lot, or if you'll need to report that as an adjustment on your tax return. My guess is that they have -- looks like whatever stock this was sold for $6.02/share, so I'm guessing you didn't pay $8.74/share just two weeks earlier. (If you did, my condolences.)

EDIT: No, I just checked Sprint's price history, you wouldn't have paid $8.74/share in mid-November. They've already rolled the disallowed amount into your basis in the third lot.
Yes, people sometimes just mentally "wash" a wash sale when the technically correct calculation is to take everything step by step with wash disallowance followed by basis adjustment, repeat, etc.
rkhusky
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Re: Why do I have a wash sale disallowance?

Post by rkhusky »

The 63 shares purchased on 11/16 were considered replacement shares for 63 of the shares purchased on 9/22, which were sold less than 30 days after the replacement shares were purchased. The amount disallowed was therefore (63/136) * (1,158.24 - 819.33) = 157.00. If you paid 6.25/sh on 11/16, then, as noted, the 157 was added to the purchase cost.
livesoft
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Re: Why do I have a wash sale disallowance?

Post by livesoft »

As already noted, check it out:

Sell for loss on 11/30 is less than 31 days from buy on 11/16.

The shares purchased on 11/16 had an adjusted basis, right? Your wash sale was eventually NOT disallowed, but the $157 was added to the basis of the 11/16 shares, right?

You can do the math: You bought 63 shares of S on 11/16 and paid $6.25 at that time. 63 * 6.25 = $393.75. Then that $393.75 was adjusted to $393.75 + 157 = $550.75 which is shown by you in this thread.

So, the only thing left to explain is the amount of $157. I will leave that as an exercise to the reader, but rkhusky has done it.

Which broker is this? You kinda want a little better reporting of the whole thing, don't you? For instance, you would like a note that the "Opening Cost" is not really "Opening Cost", but in reality is "Opening Cost or Adjusted Basis" and maybe a little footnote should note which things have an Adjusted Basis ... although it could get complicated if only part of a lot has an adjusted basis. See also: viewtopic.php?t=179414
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Topic Author
anonymoustycoon
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Re: Why do I have a wash sale disallowance?

Post by anonymoustycoon »

rkhusky wrote: Mon Jun 04, 2018 5:53 pm The 63 shares purchased on 11/16 were considered replacement shares for 63 of the shares purchased on 9/22, which were sold less than 30 days after the replacement shares were purchased. The amount disallowed was therefore (63/136) * (1,158.24 - 819.33) = 157.00. If you paid 6.25/sh on 11/16, then, as noted, the 157 was added to the purchase cost.
Thanks everyone for your answers! That is some serious accounting sorcery. :twisted: But yes, the arithmetic makes sense to me now and after some head-scratching, so does the intuition.
livesoft wrote: Mon Jun 04, 2018 5:58 pm Which broker is this? You kinda want a little better reporting of the whole thing, don't you?
My investment advisor is Personal Capital and my brokerage is Pershing LLC. (Side note: I've decided to go full Boglehead and manage these investments myself, which I hope to do soon. I opened the account when I was not so investment savvy... all measures relative of course!)

Now, two more follow up questions:
  1. Easy one first: what is the significance of the $157 disallowance? My total (short-term) loss was $501.52 (=148.39 + 181.92 + 171.21[adj]). Does this mean I can really only use $344.52 (= 501.52 - 157.00) for tax loss harvesting?
  2. Who chooses which lot (09/20 vs. 09/22) the 63 shares bought on 11/16 replace? Based on working through another example, it looks like the brokerage simply picks whichever minimizes your disallowed losses. Is that right? Who's the real hero here: my brokerage (for choosing wisely), the IRS (for making me choose wisely), or my tax-filing software (for choosing wisely)?
libralibra
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Re: Why do I have a wash sale disallowance?

Post by libralibra »

post removed
Last edited by libralibra on Mon May 27, 2019 11:24 pm, edited 1 time in total.
student
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Re: Why do I have a wash sale disallowance?

Post by student »

I am not the OP but I would also like to thank those who responded as I also misunderstood the wash sale rule.
livesoft
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Re: Why do I have a wash sale disallowance?

Post by livesoft »

anonymoustycoon wrote: Mon Jun 04, 2018 1:04 am Also, please correct me if I'm wrong: the $157 disallowance is the amount of realized losses I cannot use to offset realized gains (or deduct from my income) in 2017, although I can use it to increase my cost-basis when I buy Sprint again in 2018. Do I have it right?
And to explicitly answer this paragraph. The $157 disallowance was already used and should have been deducted from your 2017 income. All these transactions end up on your 2017 tax return. And the increase to your cost basis already happened in 2017. None of this has anything to do with your 2018 taxes. So, no you did not have it right.
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rkhusky
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Re: Why do I have a wash sale disallowance?

Post by rkhusky »

anonymoustycoon wrote: Mon Jun 04, 2018 11:13 pm Now, two more follow up questions:
  1. Easy one first: what is the significance of the $157 disallowance? My total (short-term) loss was $501.52 (=148.39 + 181.92 + 171.21[adj]). Does this mean I can really only use $344.52 (= 501.52 - 157.00) for tax loss harvesting?
  2. Who chooses which lot (09/20 vs. 09/22) the 63 shares bought on 11/16 replace? Based on working through another example, it looks like the brokerage simply picks whichever minimizes your disallowed losses. Is that right? Who's the real hero here: my brokerage (for choosing wisely), the IRS (for making me choose wisely), or my tax-filing software (for choosing wisely)?
501.52 was your loss because you recovered the disallowed loss when you sold the 11/16 shares. Incidentally, if you had bought the 11/16 shares in an IRA, you would have lost the 157.00, because you cannot adjust the basis of IRA shares.

Actually, if the brokerage had used the 9/20 shares, your disallowed loss would have been (63/74) * (594.20 - 445.81) = 126.33.
Topic Author
anonymoustycoon
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Re: Why do I have a wash sale disallowance?

Post by anonymoustycoon »

student wrote: Tue Jun 05, 2018 5:09 am I am not the OP but I would also like to thank those who responded as I also misunderstood the wash sale rule.
Yeah, this is way more complicated than I thought it was.
livesoft wrote: Tue Jun 05, 2018 6:00 am And to explicitly answer this paragraph. The $157 disallowance was already used and should have been deducted from your 2017 income. All these transactions end up on your 2017 tax return. And the increase to your cost basis already happened in 2017. None of this has anything to do with your 2018 taxes. So, no you did not have it right.
Thanks for being explicit. Understood!
rkhusky wrote: Tue Jun 05, 2018 6:16 am Actually, if the brokerage had used the 9/20 shares, your disallowed loss would have been (63/74) * (594.20 - 445.81) = 126.33.
Yikes. My mistake! So then what determines what lot gets chosen for replacement? Is it even a choice, and if so, who gets to choose? This rule makes the most sense to me:
libralibra wrote: Tue Jun 05, 2018 1:55 am The brokerage was supposed to apply the wash sale chronologically, i.e. the wash sale was supposed to be triggered on the 9/20 lot, not the 9/22 lot.
Did my brokerage screw up? Here's a very similar example (SCG - Scana Corp) where the 09/20 lot was chosen, in accordance with the above rule:

Code: Select all

Quantity  Opening Date  Opening Cost  Closing Date  Closing Cost  Disallowance
6.00      09/20/2017    346.74        11/30/2017    263.64        -55.40
13.00     09/22/2017    719.88        11/30/2017    571.22        0.00
4.00      11/16/2017    234.75        11/30/2017    175.76        0.00
I get that $55.40 = (4/6) * (346.74 - 263.64), but why choose the 09/20 lot this time? The disallowance would have been lower ($45.74 = (4/13) * (719.88 - 571.22)) if the 09/22 lot was chosen!
Last edited by anonymoustycoon on Tue Jun 05, 2018 6:05 pm, edited 1 time in total.
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dratkinson
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Re: Why do I have a wash sale disallowance?

Post by dratkinson »

rkhusky wrote: Tue Jun 05, 2018 6:16 am
anonymoustycoon wrote: Mon Jun 04, 2018 11:13 pm Now, two more follow up questions:
  1. Easy one first: what is the significance of the $157 disallowance? My total (short-term) loss was $501.52 (=148.39 + 181.92 + 171.21[adj]). Does this mean I can really only use $344.52 (= 501.52 - 157.00) for tax loss harvesting?
  2. Who chooses which lot (09/20 vs. 09/22) the 63 shares bought on 11/16 replace? Based on working through another example, it looks like the brokerage simply picks whichever minimizes your disallowed losses. Is that right? Who's the real hero here: my brokerage (for choosing wisely), the IRS (for making me choose wisely), or my tax-filing software (for choosing wisely)?
501.52 was your loss because you recovered the disallowed loss when you sold the 11/16 shares. Incidentally, if you had bought the 11/16 shares in an IRA, you would have lost the 157.00, because you cannot adjust the basis of IRA shares.

Actually, if the brokerage had used the 9/20 shares, your disallowed loss would have been (63/74) * (594.20 - 445.81) = 126.33.
Had to go look that one up. (Knew about the Roth IRA, but didn't know it applied to a traditional IRA too.)

See: Can IRA Transactions Trigger The Wash-Sale Rule?: https://www.investopedia.com/articles/r ... e-rule.asp

This is why we are advised to own unique discrete funds in our taxable account (TSM, TISM, TBM), and duplicate funds (TDR) in all of our tax-advantaged accounts (401k, IRA,...). If we have no overlap between our taxable/TA accounts then there is no chance to purchase replacement shares in a TA account and lose a TLH.
d.r.a., not dr.a. | I'm a novice investor, you are forewarned.
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archbish99
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Re: Why do I have a wash sale disallowance?

Post by archbish99 »

And http://www.fairmark.com/capgain/wash/wsmech.htm for a discussion of which shares get picked.
I'm not a financial advisor, I just play one on the Internet.
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