Wow. Would love to see where this goes. "Walk me through the mechanics" of a wash sale not having implications of my taxes throughout the year. Please tell me how it only applies to the month of December.
I had to go read several articles to grasp what he is saying. Wash sales in and of themselves immediately affect the repurchased stock by adding the loss onto the cost basis of the repurchase. So if your net loss on the sale of 100 shares of XYZ of a wash sale stock (which it is immediately labeled as soon as you repurchase same stocks) is -$200, and the repurchase price of these new lot 100 shares of XYZ 1 week later cost you $1,000 the wash sale loss is tacked on top of the $1,000 price so you pay $1,200. Let's say the stock goes up 20%. When you sell this new lot of XYZ at a 20% return for $1,200 plus the $200 loss that was a total (a total of $1,400) you will pay capital gains taxes on $200, not $400. Had there been no wash sale the $200 loss would wipe out the gain. This doesn't appear to be the case at any point in the year from what I read. However, it does appear that if you take a loss both times they are deductible, though I could be mistaken on all of this. It seems a bit ridiculous. https://www.schwab.com/resource-center/insights/content/a-primer-on-wash-sales
This is the gist of the book "Wash Sales: Year End Strategies for Active Traders". It is a free read if you have kindleunlimited on Amazon.
Exactly. Basically a wash sale impact your basis, so it's not permanent, it just exists until you make the last wash sale in the series at which point the basis adjustment reflects in your profit/loss. This is a problem if your wash series spans the end of the tax year, at least until the next tax year when you get it all back (assuming you stopped the wash cycle at some point). To avoid that, you stop the wash cycle at the end of Nov, and all the was basis moves to your P&L and thus has not tax impact to you. Do a quick search of ET or the internet regarding wash sales, this isn't an original thought of mine by any stretch of the imagination. It's a well understood idea among traders.
But, in my example, the net loss of -$200 from the first sale is tacked on top of the repurchase a week later taking the price from initially being $1,000 to now being $1,200. When it goes up 20% a week later taking the $1,000 to $1,200, plus the net loss of -$200 from the previous sale that was tacked on top of the wash sale readjustment, your total receipt at sale is $1,400 and you pay taxes only on the $200 gain. But what about the $200 net loss, that is currently gone from the previous sale, that they made you pay over and above out of your current funds, in order to tack on top of the new purchase? The initial $200 loss is gone. The $200 for the new purchase that they are tacking on top of the cost basis for the wash sale is a completely separate $200 pulled from your current funds, not this ghost -$200 that is now thin air in another trader's account. However, you're still paying taxes on the new 20%, or $200 gain, you got on the new XYZ stock while not being allowed to deduct it against that initial $200 loss from the previous sale. The $200 you got back that was tacked on top is not the same $200 you lost. That $200 is not in your account. It is in the account if the trader on the other side of the trade. The $200 they added on top of the cost basis was $200 taken from your current funds correct? So the $200 you get back is that same $200. Yet the $200 you lost initially is not deductible against the $200 you received from the 20% increase. All this to say, if you lost that $200, and cannot deduct it against the $200 from the 20%, how is the wash sale still not affecting you all throughout the year? They are effectively declaring that $200 net loss null and void, tacking a new $200 from your current funds on top, then giving you back that $200 from your current funds, giving you the $200 from the 20%, and making you pay taxes on that new 20% $200 return, while not allowing you to deduct it against that $200 you lost on the previous trade that is in some other traders account now. Am I missing something? I had to make this extremely detailed and drawn out because it is easy to get lost in translation.
You do get to eventually recapture the $200 loss, it flows through in the basis. In your example, although you bought the stock at $1,000, your basis in it is $1,200 because of the previous $200 loss. That means for purposes of calculating taxes, you act as if you paid $1,200 for it instead of the $1,000 you actually paid. Therefore, when you sell it for $1,200, your tax liability on that transaction is $0 since you have a profit of $0 from a tax basis perspective, even though you pocketed $200 in cash.
Interesting. This entire time I've been thinking I was screwed out of money on wash sales. Thank you for the clarification.
Only screwed from the perspective of giving the IRS a year long interest free loan if you hold the string of transactions through December. But you do get it all back eventually.
Why not just make wash sales effective only in December and January? It seems extremely redundant and confusing to keep them year round when they ultimately come out the same as a deduction.