Wash Sale with Gains and Losses

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Topic Author
SpideyIndexer
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Joined: Thu Apr 02, 2015 10:13 pm

Wash Sale with Gains and Losses

Post by SpideyIndexer » Sat Aug 01, 2020 3:29 pm

In changing some asset locations from taxable to TD, I may have created a small wash sale.

I sold two lots of an ETF, one with a $400 loss and one with a $300 gain on day 1. On day 2, I bought identical shares in my 401(k). I say this "may" be a wash share because very unclear whether a repurchase of identical shares within 30 days in a 401(k) would be a wash sale. (If I bought the identical shares in an IRA, it is very clear the IRS would consider this a wash sale.) So, I guess it is up to me whether to report this.

If I choose to report it on form 8949, since I did NOT buy and sell on the same day, does that mean I can offset the day 1 loss with the gain, so only the net $100 loss would be disallowed? If bought and sold on the same day, I understand the "same day rule" would apply so the entire $400 loss would be disallowed, leaving me with a $300 taxable gain.

I am glad in this case logistics delayed the repurchase by a day.

Probably I will later tax adjust my 401(k) holdings by purchasing another 25% of the holding in the 401(k). Exactly when depends on the tax consequences and price movement. Anyway, any of you taking advantage of losses to optimize asset location, be careful of wash sales. In my case the ETF did not have a good TLH partner.

rkhusky
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Re: Wash Sale with Gains and Losses

Post by rkhusky » Sat Aug 01, 2020 3:59 pm

Each block of shares is treated separately. You have a $400 wash sale.

See: https://fairmark.com/investment-taxatio ... -day-rule/

Topic Author
SpideyIndexer
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Re: Wash Sale with Gains and Losses

Post by SpideyIndexer » Sat Aug 01, 2020 4:28 pm

Ouch. I am trying to understand why is is called the "same day rule." I had thought, perhaps mistakenly, that is because the sale and purchase would have to be on the same day to disallow offsetting gains with losses. I would assume gains and losses incurring on different days within a 30 window cannot be offset either.

I suppose it is really a "separate block rule."

Gains and losses luckily were pretty small compared to the equity value. This one of those situations where selling at a loss where is not a smart thing. Also a situation where "spec id" can be detrimental.

The 401(k) question remains unresolved.

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Nate79
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Re: Wash Sale with Gains and Losses

Post by Nate79 » Sat Aug 01, 2020 4:36 pm

I, like many do not believe that 401k's are included in wash sales. You have to decide what you believe and then follow it.

Longdog
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Re: Wash Sale with Gains and Losses

Post by Longdog » Sat Aug 01, 2020 4:45 pm

From IRS Publication 550:
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Which of those conditions do you believe you have met? Why would you create a scenario to your disadvantage beyond what is specified in the official IRS documentation?
Steve

rkhusky
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Re: Wash Sale with Gains and Losses

Post by rkhusky » Sat Aug 01, 2020 4:52 pm

Longdog wrote:
Sat Aug 01, 2020 4:45 pm
From IRS Publication 550:
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Which of those conditions do you believe you have met? Why would you create a scenario to your disadvantage beyond what is specified in the official IRS documentation?
Number 1 seems all encompassing.

The wash sale statute says that a wash sale occurs when the taxpayer has acquired substantially identical stock or securities. There is no mention of account types, i.e. all account types are included. The IRS has never excluded an account type from the statute.

I find it odd that people think that because the tax instructions say that IRA's are included, that that definitely means that 401k's are excluded.

Longdog
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Location: Philadelphia

Re: Wash Sale with Gains and Losses

Post by Longdog » Sat Aug 01, 2020 5:49 pm

rkhusky wrote:
Sat Aug 01, 2020 4:52 pm
Longdog wrote:
Sat Aug 01, 2020 4:45 pm
From IRS Publication 550:
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:

Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
Which of those conditions do you believe you have met? Why would you create a scenario to your disadvantage beyond what is specified in the official IRS documentation?
Number 1 seems all encompassing.

The wash sale statute says that a wash sale occurs when the taxpayer has acquired substantially identical stock or securities. There is no mention of account types, i.e. all account types are included. The IRS has never excluded an account type from the statute.

I find it odd that people think that because the tax instructions say that IRA's are included, that that definitely means that 401k's are excluded.
Do you have access to the actual statute? Would be interesting to see.

I agree that number 1 does seem all encompassing, and if it were the only one mentioned, not just 1 of 4 conditions, it would seem to be sufficient to cover everything. Yet for some reason they added 3 more specific conditions (in the publication they are numbered), not as examples, but as specific conditions. I find that odd since they use examples all over the place in the document. Similarly I find it odd that they explicitly use the term “acquire” (not “buy”), only mention “stock” (not “stock or securities”), and call out only traditional and Roth IRAs, not “any tax-advantaged account” which would cover them all. Does the term “acquire” mean something specific and different from “buy”?

It is very strange how they describe it in pub 550.
Steve

sycamore
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Re: Wash Sale with Gains and Losses

Post by sycamore » Sat Aug 01, 2020 7:25 pm

OP, if you acknowledge it's a wash sale (and file your tax return accordingly), the loss is gone forever.

From https://www.bogleheads.org/wiki/Wash_sale#Consequences
If you have a wash sale and the replacement shares are a tax-sheltered account, such as an IRA or Roth IRA, you will lose all benefit from the capital loss (there is no mechanism for basis adjustment and you do not pay capital gains tax in a tax-sheltered account).
A $400 capital loss is $100 in taxes in the 25% bracket, assuming you were to offset income with the loss. Not the end of the worry but it's super annoying. I did this to myself once -- bought the same security in a Traditional IRA that I sold at a loss in taxable, all because I mistyped the ticker symbol and didn't carefully check my order before clicking the Submit button. :oops:

rkhusky
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Re: Wash Sale with Gains and Losses

Post by rkhusky » Sat Aug 01, 2020 9:03 pm

Longdog wrote:
Sat Aug 01, 2020 5:49 pm
Do you have access to the actual statute? Would be interesting to see.
The statute is listed here:
https://www.law.cornell.edu/uscode/text/26/1091
The pertinent paragraph is (a).

Other links are listed in the wiki article on wash sales:
https://www.bogleheads.org/wiki/Wash_sale

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