A wash sale occurs when you sell or otherwise dispose of stock or securities at a loss and, within 30 days before or after the sale, you buy or acquire substantially identical stock or securities, enter into a contract or option to buy such securities, or acquire them in a fully taxable trade or in an IRA/Roth IRA. Under Internal Revenue Code section 1091, losses from wash sales are generally disallowed for tax deduction purposes unless the loss was incurred in the ordinary course of business as a dealer in stock or securities.
Key Rules and Exceptions
- 30-Day Rule: The wash sale period includes 30 days before and after the sale or disposition. Any purchase of substantially identical securities within this window triggers the wash sale rule.
- Substantially Identical Securities: This includes the same stock, options, warrants, or contracts for the same security. For example, selling common stock at a loss and buying warrants for the same stock triggers the rule.
- Dealers Exception: The wash sale rules do not apply to dealers in stock or securities if the loss is from a transaction made in the ordinary course of business.
- Short Sales: The wash sale rules apply to losses from short sales if you sell or enter into another short sale of substantially identical securities within 30 days before or after the short sale is considered complete. A short sale is considered complete on the date it is entered into if you own or have a contract to acquire the stock by that date.
- Options and Futures Contracts: The wash sale rules apply to losses from sales or trades of contracts and options to acquire or sell stock or securities. However, they do not apply to losses from commodity futures contracts or foreign currencies.
- Residual Interests in REMICs: The wash sale rules apply to residual interests in real estate mortgage investment conduits (REMICs) if you acquire any residual interest in any REMIC or comparable taxable mortgage pool within 6 months before or after the sale.
- Securities Futures Contracts: Losses from securities futures contracts to sell are treated similarly to short sales. The gain or loss is generally treated as short-term regardless of holding period.
Reporting and Basis Adjustment
- Reporting on Form 8949: Report wash sale transactions in Part I or Part II of Form 8949. Check the appropriate box, enter "W" in column (f), and enter the disallowed loss as a positive number in column (g).
- Basis Adjustment: The basis of the newly acquired substantially identical property is increased by the amount of the disallowed loss. This adjustment applies to the cost basis of the new securities.
- Form 1099-B/1099-DA: If you received a Form 1099-B or Form 1099-DA, box 1g (or box 1i) may show the amount of nondeductible wash sale loss if the securities were covered securities and purchased in the same account with the same CUSIP number. However, even if not reported, the loss remains nondeductible.
Holding Period and Carryover
- Holding Period: The holding period for newly acquired substantially identical securities includes the period you held the previously sold securities.
- Capital Loss Carryover: Disallowed wash sale losses can be carried forward to future tax years. Use the Capital Loss Carryover Worksheet in Publication 550 to calculate the amount carried forward.
Source:
Publication 550
Form 1099-B
Schedule D
Disclaimer: Always verify details with current Federal or State Department of Revenue Forms and Instructions. For complex tax situations, consult a CPA or tax attorney.