If I buy and then sell the same equity twice within the same calendar year (i.e., I am completely out of the position prior to the end of the year, and assuming that I don't subsequently enter into a position in that same equity during the first 30 days of the next calendar year), then wouldn't I show the same results for tax purposes regardless of how much time elapsed between the two trades? So, for example, if I bought and sold MSFT in June and then bought and sold MSFT again in July (i.e., within the 30-day window), then I don't necessarily have to worry about matching them up for a wash sale, because the gain/loss of the two trades would be captured anyway within the same tax year, right? The wording of the wash sale rule seems only to make a difference for trades that take place at the turn of the calendar year, where a person could book a loss before the year ends and then reset the basis for gains to be realized the following year. Am I confused, or is that how it works?
I've been reading through related threads, and some people give the advice that if you don't trade in December and January, then you don't have to worry about wash sale rules. So, it seems that my previous post is correct. However, does the IRS still require you to document ALL wash sales, even if it shows no difference from normal accounting?
The IRS does not look at your return with a fine tooth comb for wash sales. Try these guys for info. They are pros at Trader's Taxation. Lots of info on web site. http://www.greencompany.com/
I've read through their site, and unfortunately they say nothing regarding wash sales that occur in the middle of the year.
The wash sale rule basically states that if you sell a stock at a loss and buy replacement stock 30-days before, or 30- days after the sale of the same stock, you canât deduct the loss. This rule does not apply to gains but only to losses. Naturally, the IRS wants to tax all of your gains. The best way to show the impact of the wash sale rule is through the following example: On October 20, 2002 you purchase 1000 shares of Microsoft at $35 a share. On December 15, 2002 you sell the 1000 shares in Microsoft at $15 a share and recognize a 20,000 loss. On January 5, 2003 you buy back 1000 shares of Microsoft at $15 a share. Unfortunately, because of the wash sale rules, that $20,000 loss that the taxpayer thought they recognized in 2002 is disallowed. If you wind up with a wash sale, add your disallowed loss to the basis of your replacement security. Your new basis is the purchase price of the replacement, plus the loss you couldn't take, plus fees related to the securityâs purchase. This means that your loss is postponed; itâs not gone forever. In the above example the taxpayers basis in the Microsoft stock he repurchase on January 5, 2003 would be $35 a share and not the $15 a share he purchased it at. The definition of replacement stock is not obvious either. The IRS says it canât be âsubstantially identicalâ to the security you sold. Itâs easier to differentiate stocks than it is mutual funds, as no stock is substantially identical to another, even within the same industry. After all, each company differs from others in numerous ways. When you sell the replacement security at a profit later, your basis will be higher, so your gain will lower. The end result? Less tax on a smaller gain. If you sell lower than your replacement security basis, your loss will be larger than it would be if based on the repurchase price alone, so you do get some recovery. All is not lost. In your above example if you bought and sold Microsoft at a loss in June and July and did not buy back the stock within the 61 day period than the wash sale rule would not apply. When you make a wash sale, your holding period for the replacement stock includes the period you held the stock you sold. This rule prevents you from converting a long-term loss into a short-term loss. There are three ways to avoid the wash sale rule all together. The first way is to not buy back the stock or option within the 61 day period (30 days prior to the sale or 30 days after the sale). Another way to avoid having to deal with the wash sale rule is to elect the Mark-to-Market method of accounting. Of course this accounting election is only available to the active trader and not to someone who is an investor. Finally, the last way to avoid the wash sale rule is to trade in Futures, commodities, index options or forex. This type of trading falls under the rules of IRC 1256 and they have some fantastic tax benefits associated with them.
Dave, Thanks for the detailed description. Just to be sure, I want to pose a question as follows: Let say I trade the SPY and QQQ 30 times per day. I do this for 11 months. If I take the month of December off, can I begin trading these again actively on Jan 2nd? Or do I have to wait until Feb 1st? The underlying assumption in my question is that I'm trying to avoid making a revised basis calculation from a wash sale on a huge amount of trades for that year. Thanks again for your input.
Dave Fleck, Thank you for a great detailed reply. I avoid the issue, I hope , by not trading stocks in December. I only trade futures, which do not have this particular tax problem.
Would an option on the same underlying security or index but with a different strike price or expiration month avoid a wash sale ? I haven't been able to get an answer on this.
Suppose you've sold a call option at a loss. Buying another call option on the same stock within the wash sale period may be viewed as a wash sale even if the new call option has a different expiration or a different strike price. http://www.fairmark.com/capgain/wsoption.htm The options on the QQQs and the other exchange-traded options of index stocks are subject to the provisions of IRS Code Section 1256. http://www.tradersaccounting.com/a_quest14.asp Most if not all publicly traded index options are nonequity options and get the 1256 tax treatment.