Still a bit confused about wash sales

[johnanglemen]

I buy $1,000 of stock. Ten days later, I sell $500 of it at a loss. Do I have a wash sale? My CPA says no because I haven't purchased "replacement shares"; I am merely selling the original shares I purchased. However, this doesn't seem to jive with the "no purchases 30 days before or after a sale." Can someone help me understand?

[livesoft]

One needs to understand the concept of replacement shares. That is, one has to still own shares that replaced the shares you sold at a loss. If you buy and sell the same shares, there are no replacement shares unless you have bought more shares either before or after the shares you wrote about.

Now try this: You buy 1000 shares of stock. 10 days later you sell 500 shares at a loss. Is that a wash sale? Answer: No.

And a couple of questions: Did you read anything published by the IRS about wash sales? Or are you going by what folks on the internet or your CPA tell you?

Also change "no purchases 30 days before or after a sale" to "no purchases of replacement shares 30 days before or after a sale at a loss."

[johnanglemen]

One needs to understand the concept of replacement shares. That is, one has to still own shares that replaced the shares you sold at a loss. If you buy and sell the same shares, there are no replacement shares unless you have bought more shares either before or after the shares you wrote about.

Now try this: You buy 1000 shares of stock. 10 days later you sell 500 shares at a loss. Is that a wash sale? Answer: No.

You say "one has to still own shares that replaced the shares you sold at a loss." Why don't the remaining 500 shares I purchased and didn't sell count as those shares?

[johnanglemen]

I guess this explains it. Confusing!

http://www.fairmark.com/capgain/wash/wsreplac.htm

[livesoft]

Maybe I am wrong.

Here's the way I think about it: If I end up back where I started, but also got a tax break, then that's probably a wash sale.

Note that if I sell TotalStockMarket shares at a loss and immediately buy LargeCapIndex shares with the money, then I don't end up back where I started even if it is pretty darn close to where I started.

[sscritic]

The IRS instructions are confusing. They assume you have replacement shares. The examples they use all have shares left after the sale.

The key is to realize that you are not substantially identical to yourself; your twin brother is substantially identical to yourself.

A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you:

Buy substantially identical stock or securities,
...

I bought 100 shares. I sold 100 shares. None of these shares are substantially identical; they are the same shares.

Example 1.

You buy 100 shares of X stock for $1,000. You sell these shares for $750 and within 30 days from the sale you buy 100 shares of the same stock for $800. Because you bought substantially identical stock, you cannot deduct your loss of $250 on the sale. However, you add the disallowed loss of $250 to the cost of the new stock, $800, to obtain your basis in the new stock, which is $1,050.

The shares bought later are not the same shares you already sold. However, they are substantially identical.

Now when something about the law seems confusing, I like to read the law for myself. So let's all read along with 26 USC 1091

(a) Disallowance of loss deduction
In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business.

The key is the appearance, just as it is in a step transaction. However, the IRS leaves out the word appear or appearance in the instructions. Why they don't follow the law, I don't know.

I would never apply the words substantially identical to myself. I am who I am. There may be someone else who appears to be substantially identical to me, but I am not that person.

[sscritic]

P.S. The CFR does not use the word appear, but every example leaves shares on the table.
http://www.gpo.gov/fdsys/pkg/CFR-2012-t ... 1091-2.pdf

Begin here for the text without appear (all the examples are on the next page, linked above).
http://www.gpo.gov/fdsys/pkg/CFR-2012-t ... 1091-1.pdf

[Blue88]

Question: I sell all shares of an S&P 500 index fund at a gain and invest the entire amount in a Total Stock Mkt Index Fund with another company. Do I care about the wash sale rule with a capital gain or does this just apply to selling at a loss?

blue88

[jbran99]

Question: I sell all shares of an S&P 500 index fund at a gain and invest the entire amount in a Total Stock Mkt Index Fund with another company. Do I care about the wash sale rule with a capital gain or does this just apply to selling at a loss?

It only applies for losses.

[Blue88]

Jbran99
Thank you.
Blue88