More Wash-Sale Matters for the Tax Nerds

Beverly,

What happens if you have a wash sale (sell stocks at a loss but repurchase within the taboo 61-day period), but you don't hold any of your stocks for longer than a month? Specifically, what happens to the basis adjustment in the repurchased shares if they, too, are sold within 30 days?

Thanks for your help!

Alan A.

Well, Alan, the short answer is that it all comes out in the wash. When you repurchase shares in a wash sale, the basis gets adjusted upward by the amount of the disallowed loss. Whenever you sell those shares, you'll get the delayed tax benefit -- in the form of either owing less in capital gains tax (if the shares appreciated) or a greater loss. (Even if the shares remained the same price as when you purchased them, you'd still be able to claim a loss, since your basis was inflated by the loss from your previous position.)

It doesn't matter when you sell those repurchased shares. You'll get a tax break whenever you do ... provided, of course, that you don't again run afoul of the wash-sale rule. If you do, simply adjust the basis in those shares and delay the tax break once more. Once you've closed out of a position entirely for 30 days, you'll be able to take advantage of the tax break inherent in the new basis of the last shares to be sold.

So no matter how many times you've run afoul of the wash-sale rule in a given tax year, if you're completely closed out of the position 30 days before the end of the year, you're allowed to claim the loss.

Is there a "reverse" wash rule?

For instance, I had a stop loss in while I was on vacation, which triggered. I got home and decided that I really liked the stock, and bought it back, about two weeks after the stop loss triggered, for less than the stop-loss sale. Now, can I just use the profit from the sale and re-buy to lower my basis, or do I have to report the profit on the IRS schedule D?

Giles G.

The wash-sale rule applies only to the deductibility of losses -- not the taxability of gains. It sounds like when the stop loss (a customer order to a broker to sell the security once its price drops to a certain level below its current trading price) was triggered, you sold the stock at a profit. The stock price continued to fall, and you repurchased the shares at a lower price.