Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

I am trying to plan ahead for 2022 taxes and trying to understand how exactly disallowed losses work for taxes and the impact on cost basis. I will use a hypothetical example to try to better understand how this works:

Let's say someone enters 2022 with 100 shares of asset $XYZ purchased for $10 per share in October 2021. So his cost basis info entering 2022 is:

100 shares of $XYZ for $1000 total ($10 / share) purchased in October 2021

Now let's say on January 2, 2022, he sells 90 shares of $XYZ for $5 per share. So he has 10 shares left.

On January 3, 2022, he buys 200 more shares of $XYZ for $4 per share. So he now has 210 shares.

On January 4, 2022 he sells 195 shares of $XYZ for $3 per share. So he has 15 shares left at the end of this.

In this scenario, assuming he makes no more trades for the year, what would be his capital gains and/or capital losses from this? And what would be his final cost basis information for $XYZ? He would have 15 shares left at the end of this.
livesoft
Posts: 78900
Joined: Thu Mar 01, 2007 8:00 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by livesoft »

You go first, then it will be easier for the peanut gallery to mark it up.

-or-

Your brokerage will probably do the right thing and send you a 1099B in 2023 with the info you need so that simply importing into tax software will be all you need to do. :)
Wiki This signature message sponsored by sscritic: Learn to fish.
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

Are you using average cost basis or specific ID cost basis?

And the markets weren’t open on Jan 2.
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

rkhusky wrote: Thu Jan 06, 2022 7:30 pm Are you using average cost basis or specific ID cost basis?

And the markets weren’t open on Jan 2.
I would be using first-in-first-out.

Yeah, my situation is different but if I understand this then I should be able to figure out mine. And I figured it would be easier to use round numbers for the example to make it easier to follow.
livesoft wrote: Thu Jan 06, 2022 7:23 pm You go first, then it will be easier for the peanut gallery to mark it up.

-or-

Your brokerage will probably do the right thing and send you a 1099B in 2023 with the info you need so that simply importing into tax software will be all you need to do. :)
Ok, so this would be my guess but I'm not sure if it's right at all.

I would think the loss on the sale of 90 shares on January 2 would be disallowed when buying 90 (of 200) shares on January 3. So what would normally be a loss of ($10 - $5) = $5 per share would not count. Instead that $5 per share would be added to the new cost basis. So after the January 3 purchase, there would be no allowed capital loss (and also no capital gain) so far. The cost basis at that point would be:
10 shares for $10/share
90 shares for $9/share
110 shares for $4/share

So then when selling 195 shares on January 4, there would be a $7/share loss on the first 10 shares, a $6/share loss on the next 90 shares, and a $1/share loss on the next 95 shares.

So that would be a short term capital loss of:
$7*10+$6*90+$1*95=$705

So I think the total would be 0 capital gains and $705 of short term capital losses. And the remaining cost basis info would be 15 shares with a cost basis of $4 / share.

Is that right or am I doing something wrong?
nalor511
Posts: 2464
Joined: Mon Jul 27, 2015 1:00 am

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by nalor511 »

You can put these sales into last year's tax software (or this year's) and see what comes out
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

VartAndelay wrote: Thu Jan 06, 2022 7:59 pm
So then when selling 195 shares on January 4, there would be a $7/share loss on the first 10 shares, a $6/share loss on the next 90 shares, and a $1/share loss on the next 95 shares.
What you have seems right. However, it’s not clear to me that the $9/sh shares will necessarily be sold before the $4/sh shares since they were bought at the same time. So you could end up with 15 sh at $9/sh. Although, perhaps you could argue that those shares were the first in because they were tagged as the replacement shares.
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

I miswrote previously. The cost basis methods are average cost and actual cost. FIFO and SpecID are share selection methods.
User avatar
iceport
Posts: 5625
Joined: Sat Apr 07, 2007 4:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

VartAndelay wrote: Thu Jan 06, 2022 7:59 pm Ok, so this would be my guess but I'm not sure if it's right at all.

I would think the loss on the sale of 90 shares on January 2 would be disallowed when buying 90 (of 200) shares on January 3. So what would normally be a loss of ($10 - $5) = $5 per share would not count. Instead that $5 per share would be added to the new cost basis. So after the January 3 purchase, there would be no allowed capital loss (and also no capital gain) so far. The cost basis at that point would be:
10 shares for $10/share
90 shares for $9/share
110 shares for $4/share

So then when selling 195 shares on January 4, there would be a $7/share loss on the first 10 shares, a $6/share loss on the next 90 shares, and a $1/share loss on the next 95 shares.

So that would be a short term capital loss of:
$7*10+$6*90+$1*95=$705

So I think the total would be 0 capital gains and $705 of short term capital losses. And the remaining cost basis info would be 15 shares with a cost basis of $4 / share.

Is that right or am I doing something wrong?
That all looks really good, except at the end. Isn't the last sale on 1/4/22 a partial wash sale?

So $7*10sh.+6*5sh.=$100 of the $705 loss would be disallowed, right?

And the remaining 15 shares, purchased on 1/3/22, would consist of 10 sh. @ $4+7=$11/sh. and 5 sh. @$4+6=$10/sh.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
User avatar
iceport
Posts: 5625
Joined: Sat Apr 07, 2007 4:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

rkhusky wrote: Thu Jan 06, 2022 10:27 pm However, it’s not clear to me that the $9/sh shares will necessarily be sold before the $4/sh shares since they were bought at the same time. So you could end up with 15 sh at $9/sh. Although, perhaps you could argue that those shares were the first in because they were tagged as the replacement shares.
I think that's how it would work, because it's not only the cost basis of the replacement shares that gets adjusted, but the holding period also. So actually, part of the allowed loss would be long term, right?
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

iceport wrote: Thu Jan 06, 2022 11:28 pm
VartAndelay wrote: Thu Jan 06, 2022 7:59 pm Ok, so this would be my guess but I'm not sure if it's right at all.

I would think the loss on the sale of 90 shares on January 2 would be disallowed when buying 90 (of 200) shares on January 3. So what would normally be a loss of ($10 - $5) = $5 per share would not count. Instead that $5 per share would be added to the new cost basis. So after the January 3 purchase, there would be no allowed capital loss (and also no capital gain) so far. The cost basis at that point would be:
10 shares for $10/share
90 shares for $9/share
110 shares for $4/share

So then when selling 195 shares on January 4, there would be a $7/share loss on the first 10 shares, a $6/share loss on the next 90 shares, and a $1/share loss on the next 95 shares.

So that would be a short term capital loss of:
$7*10+$6*90+$1*95=$705

So I think the total would be 0 capital gains and $705 of short term capital losses. And the remaining cost basis info would be 15 shares with a cost basis of $4 / share.

Is that right or am I doing something wrong?
That all looks really good, except at the end. Isn't the last sale on 1/4/22 a partial wash sale?

So $7*10sh.+6*5sh.=$100 of the $705 loss would be disallowed, right?

And the remaining 15 shares, purchased on 1/3/22, would consist of 10 sh. @ $4+7=$11/sh. and 5 sh. @$4+6=$10/sh.
Doing above in painful detail:

End of 1/3, there are:
10 sh @ $10/sh, date of 1/2
90 sh @ $9/sh, date of 1/2 (holding period adjustment)
110 sh @ $4/sh, date of 1/3

On 1/4,
10 sh sold, with a cap loss of $7/sh, but there is a wash sale
90 sh @ $9/sh -> 10 sh @ $16/sh + 80 sh @ $9/sh

10 sh sold, with a cap loss of $13/sh + 80 sh sold, with a cap lost of $6/sh, but there is a wash sale
110 sh @ $4/sh -> 10 sh @ $17/sh (date=1/2) + 80 sh @ $10/sh (date=1/2) + 20 sh @ $4/sh (date=1/3)

10 sh sold, with a cap loss of $14/sh and 10 sh sold, with a cap loss of $7/sh, but there is a wash sale
20 sh @ $4/sh -> 10 sh @ $18/sh (date=1/2) + 10 sh @ $11/sh (date=1/2)

At this point, of the 210 shares, 120 sh have been sold, leaving:
70 sh @ $10/sh (date=1/2) + 10 sh @ $18/sh (date=1/2) + 10 sh @ $11/sh (date=1/2)

70 sh sold, with a cap loss of $7/sh + 5 sh sold, with a cap loss of $15/sh, for a total cap loss of $490 + $75 = $565
Remaining shares are 5 sh @ $18/sh (date=1/2) + 10 sh @ $11/sh (date=1/2), which are worth $90 + $110 = $200
(Not sure of the order of sales here, due to all now having a date of 1/2)

Received cash for share sales of $450 (1/3) + ($30 + $270 + $285) (1/4) = $1035

Total value = $1800
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

rkhusky wrote: Fri Jan 07, 2022 9:55 am
iceport wrote: Thu Jan 06, 2022 11:28 pm
VartAndelay wrote: Thu Jan 06, 2022 7:59 pm Ok, so this would be my guess but I'm not sure if it's right at all.

I would think the loss on the sale of 90 shares on January 2 would be disallowed when buying 90 (of 200) shares on January 3. So what would normally be a loss of ($10 - $5) = $5 per share would not count. Instead that $5 per share would be added to the new cost basis. So after the January 3 purchase, there would be no allowed capital loss (and also no capital gain) so far. The cost basis at that point would be:
10 shares for $10/share
90 shares for $9/share
110 shares for $4/share

So then when selling 195 shares on January 4, there would be a $7/share loss on the first 10 shares, a $6/share loss on the next 90 shares, and a $1/share loss on the next 95 shares.

So that would be a short term capital loss of:
$7*10+$6*90+$1*95=$705

So I think the total would be 0 capital gains and $705 of short term capital losses. And the remaining cost basis info would be 15 shares with a cost basis of $4 / share.

Is that right or am I doing something wrong?
That all looks really good, except at the end. Isn't the last sale on 1/4/22 a partial wash sale?

So $7*10sh.+6*5sh.=$100 of the $705 loss would be disallowed, right?

And the remaining 15 shares, purchased on 1/3/22, would consist of 10 sh. @ $4+7=$11/sh. and 5 sh. @$4+6=$10/sh.
Doing above in painful detail:

End of 1/3, there are:
10 sh @ $10/sh, date of 1/2
90 sh @ $9/sh, date of 1/2 (holding period adjustment)
110 sh @ $4/sh, date of 1/3

On 1/4,
10 sh sold, with a cap loss of $7/sh, but there is a wash sale
90 sh @ $9/sh -> 10 sh @ $16/sh + 80 sh @ $9/sh

10 sh sold, with a cap loss of $13/sh + 80 sh sold, with a cap lost of $6/sh, but there is a wash sale
110 sh @ $4/sh -> 10 sh @ $17/sh (date=1/2) + 80 sh @ $10/sh (date=1/2) + 20 sh @ $4/sh (date=1/3)

10 sh sold, with a cap loss of $14/sh and 10 sh sold, with a cap loss of $7/sh, but there is a wash sale
20 sh @ $4/sh -> 10 sh @ $18/sh (date=1/2) + 10 sh @ $11/sh (date=1/2)

At this point, of the 210 shares, 120 sh have been sold, leaving:
70 sh @ $10/sh (date=1/2) + 10 sh @ $18/sh (date=1/2) + 10 sh @ $11/sh (date=1/2)

70 sh sold, with a cap loss of $7/sh + 5 sh sold, with a cap loss of $15/sh, for a total cap loss of $490 + $75 = $565
Remaining shares are 5 sh @ $18/sh (date=1/2) + 10 sh @ $11/sh (date=1/2), which are worth $90 + $110 = $200
(Not sure of the order of sales here, due to all now having a date of 1/2)

Received cash for share sales of $450 (1/3) + ($30 + $270 + $285) (1/4) = $1035

Total value = $1800
I don't understand how you determined which sales on 1/4 would be considered wash sales and which sales on 1/4 would not be considered wash sales. Can you please explain that?
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

VartAndelay wrote: Fri Jan 07, 2022 10:33 am I don't understand how you determined which sales on 1/4 would be considered wash sales and which sales on 1/4 would not be considered wash sales. Can you please explain that?
The important thing is to keep things in date order and in this case, time order too. I assumed that the original date is before an adjusted date, but in looking at it again, I don't know if I was consistent. And there might be further wash sales in my last step. I'll have to take a look at that again. Essentially, if you sell for a loss and there are other shares purchased within +- 30 days, there is a wash. Because your example has a number of odd lots, it splits up lots into multiples, where some are replacement shares and some are not.
User avatar
iceport
Posts: 5625
Joined: Sat Apr 07, 2007 4:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

rkhusky wrote: Fri Jan 07, 2022 9:55 am Doing above in painful detail...
That's not how I see it, rkhusky. I would definitely not consider shares being sold at the same time in the same order to be replacement shares. That might end up producing the correct result, but it's way more complicated than it needs to be.

Gotta go do some snow shoveling right now, but will try to document how I would approach it later.

VartAndelay wrote: Fri Jan 07, 2022 10:33 am I don't understand how you determined which sales on 1/4 would be considered wash sales and which sales on 1/4 would not be considered wash sales. Can you please explain that?
Wash shares are matched with replacement shares chronologically. Your shares also happen to have been selected for selling chronologically (FIFO). When there is a wash sale, the first shares sold at a loss are matched with the first replacement shares bought — in other words, the oldest, including any holding period adjustment.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

iceport wrote: Fri Jan 07, 2022 11:06 am
rkhusky wrote: Fri Jan 07, 2022 9:55 am Doing above in painful detail...
That's not how I see it, rkhusky. I would definitely not consider shares being sold at the same time in the same order to be replacement shares. That might end up producing the correct result, but it's way more complicated than it needs to be.
It does get complicated if one does it lot by lot. Doing the example more carefully, with putting adjusted shares chronically behind unadjusted shares, I end up with 5 sh @ $11/sh and 10 sh @ $52/sh.

Perhaps it is better to start with the replacement shares and identify to which sale for a loss transaction they came from. In that case, of the 15 replacement shares, I would connect 10 shares with the 10 sh @ $10/sh, date of 1/2 and 5 shares from the lot (90 sh @ $9/sh, date of 1/2 (holding period adjustment)), yielding and adjustment of $7 for 10 shares and $6 for 5 shares, resulting in 10 sh @ $11/sh and 15 sh @ $10/sh.

Both methods would yield the same thing once all shares are sold.
FactualFran
Posts: 1594
Joined: Sat Feb 21, 2015 2:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

VartAndelay wrote: Thu Jan 06, 2022 7:59 pm Is that right or am I doing something wrong?
Your results are right if there is no wash sale when the only possible replacement shares for wash sale purposes are part of the same purchase lot as the shares being sold. However, it is necessary to go though the details to determine that the only possible replacement shares for wash sale purposes were part of the same purchase lot as the shares being sold

According to the Selling Half section of the Wash Sales and Replacement Stock web page at Fairmark.com, it is not a wash sale for the simple example in that web page. That example does not have a complication of the case being discussed here of possible replacement shares having had their cost adjusted due to a previous sale that was a wash sale.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

VartAndelay wrote: Thu Jan 06, 2022 7:16 pm I am trying to plan ahead for 2022 taxes and trying to understand how exactly disallowed losses work for taxes and the impact on cost basis. I will use a hypothetical example to try to better understand how this works:

Let's say someone enters 2022 with 100 shares of asset $XYZ purchased for $10 per share in October 2021. So his cost basis info entering 2022 is:

100 shares of $XYZ for $1000 total ($10 / share) purchased in October 2021

Now let's say on January 2, 2022, he sells 90 shares of $XYZ for $5 per share. So he has 10 shares left.

On January 3, 2022, he buys 200 more shares of $XYZ for $4 per share. So he now has 210 shares.

On January 4, 2022 he sells 195 shares of $XYZ for $3 per share. So he has 15 shares left at the end of this.

In this scenario, assuming he makes no more trades for the year, what would be his capital gains and/or capital losses from this? And what would be his final cost basis information for $XYZ? He would have 15 shares left at the end of this.
5 washed shares after all is said and done, the basis of which is adjusted by $1 each by the January 4th buy. It is unclear whether the specific lots chosen were previously adjusted by the January 4th buy or not.

The January 2 sale is washed by the January 3rd purchase, so the shares purchased on 1/3 are adjusted.

The sale on the 4th is likewise washed, so remaining shares held within the period are adjusted.
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

rkhusky wrote: Fri Jan 07, 2022 2:47 pm
iceport wrote: Fri Jan 07, 2022 11:06 am
rkhusky wrote: Fri Jan 07, 2022 9:55 am Doing above in painful detail...
That's not how I see it, rkhusky. I would definitely not consider shares being sold at the same time in the same order to be replacement shares. That might end up producing the correct result, but it's way more complicated than it needs to be.
It does get complicated if one does it lot by lot. Doing the example more carefully, with putting adjusted shares chronically behind unadjusted shares, I end up with 5 sh @ $11/sh and 10 sh @ $52/sh.

Perhaps it is better to start with the replacement shares and identify to which sale for a loss transaction they came from. In that case, of the 15 replacement shares, I would connect 10 shares with the 10 sh @ $10/sh, date of 1/2 and 5 shares from the lot (90 sh @ $9/sh, date of 1/2 (holding period adjustment)), yielding and adjustment of $7 for 10 shares and $6 for 5 shares, resulting in 10 sh @ $11/sh and 15 sh @ $10/sh.

Both methods would yield the same thing once all shares are sold.
Thanks, I am still quite confused though.

By no means am I saying you are wrong. For all I know you might be correct. But I still don't understand how you arrived at those numbers exactly. I am going to try to reread what you have written several times and understand this better.

I guess what is intuitively making no sense to me is how the final cost basis could be so much higher than any logical cost basis considering the share prices are significantly greater than any of the actual purchases. I suppose the rule might work out that way (I don't know), but if so then it seems to me that the rule is counter to any logical treatment. Why in the world should the final cost basis be able to be greater, let alone so much greater, than any of the actual purchases?
an_asker
Posts: 3825
Joined: Thu Jun 27, 2013 2:15 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by an_asker »

VartAndelay wrote: Fri Jan 07, 2022 4:00 pm [...]
Thanks, I am still quite confused though.

By no means am I saying you are wrong. For all I know you might be correct. But I still don't understand how you arrived at those numbers exactly. I am going to try to reread what you have written several times and understand this better.

I guess what is intuitively making no sense to me is how the final cost basis could be so much higher than any logical cost basis considering the share prices are significantly greater than any of the actual purchases. I suppose the rule might work out that way (I don't know), but if so then it seems to me that the rule is counter to any logical treatment. Why in the world should the final cost basis be able to be greater, let alone so much greater, than any of the actual purchases?
I didn't read the entire thread too closely. My understanding (and I might be wrong!) is that the 15 shares you currently own will have a high cost price and you will be able to deduct $0 against your losses thus far per your example scenario.

I prefer keeping things clean - I would just sell the remaining 15 shares then repurchase 31+ days later ...
livesoft
Posts: 78900
Joined: Thu Mar 01, 2007 8:00 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by livesoft »

VartAndelay wrote: Fri Jan 07, 2022 4:00 pm... Why in the world should the final cost basis be able to be greater, let alone so much greater, than any of the actual purchases?
Because that way the previously temporarily disallowed losses from any/all wash sales will be realized when you finally sell any and/or all replacement shares that created the wash sales in the first place. That is, your losses do not magically disappear, but instead you get them all back to reduce any gains (or increase any losses) when you eventually sell those "replacement" shares.
Wiki This signature message sponsored by sscritic: Learn to fish.
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

an_asker wrote: Fri Jan 07, 2022 4:17 pm
VartAndelay wrote: Fri Jan 07, 2022 4:00 pm [...]
Thanks, I am still quite confused though.

By no means am I saying you are wrong. For all I know you might be correct. But I still don't understand how you arrived at those numbers exactly. I am going to try to reread what you have written several times and understand this better.

I guess what is intuitively making no sense to me is how the final cost basis could be so much higher than any logical cost basis considering the share prices are significantly greater than any of the actual purchases. I suppose the rule might work out that way (I don't know), but if so then it seems to me that the rule is counter to any logical treatment. Why in the world should the final cost basis be able to be greater, let alone so much greater, than any of the actual purchases?
I didn't read the entire thread too closely. My understanding (and I might be wrong!) is that the 15 shares you currently own will have a high cost price and you will be able to deduct $0 against your losses thus far per your example scenario.

I prefer keeping things clean - I would just sell the remaining 15 shares then repurchase 31+ days later ...
Thanks, these numbers were hypothetical as my exact situation is a bit different. I have a lot more trades and different cost bases to keep track off, so I used a simplified example that I should be able to extrapolate to my own.

But as I mentioned, while I do not rule out it being possible, it still seems bizarre and a result of an illogical rule to have the remaining cost bases be higher (let alone significantly higher!) than any of the actual share purchase prices. That just doesn't make any sense to me.
User avatar
gobel
Posts: 438
Joined: Mon Feb 08, 2021 4:50 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by gobel »

VartAndelay wrote: Thu Jan 06, 2022 7:59 pm The cost basis at that point would be:
[lot 1: ] 10 shares for $10/share
[lot 2a:] 90 shares for $9/share
[lot 2b:] 110 shares for $4/share
It's actually possible in this example to clear out all the wash sales. The key is that shares cannot trigger wash sales on shares within the same lot.

So on Jan 4, first sell lot 1. This will trigger a wash sale onto lot 2b (2a cannot trigger another wash sale so it is skipped). This leads to

lot 2a: 90 shares for $9/share
lot 2b: 10 shares for $11/share
lot 2c: 100 shares for $4/share

Then sell all of lot 2a and 2b and 85 shares from lot 2c. No further wash sales will be triggered, since these are all shares from the same original lot 2. You are left with realized losses of $705 and

lot 2: 15 shares for $4/share
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

livesoft wrote: Fri Jan 07, 2022 4:20 pm
VartAndelay wrote: Fri Jan 07, 2022 4:00 pm... Why in the world should the final cost basis be able to be greater, let alone so much greater, than any of the actual purchases?
Because that way the previously temporarily disallowed losses from any/all wash sales will be realized when you finally sell any and/or all replacement shares that created the wash sales in the first place. That is, your losses do not magically disappear, but instead you get them all back to reduce any gains (or increase any losses) when you eventually sell those "replacement" shares.
Well, I understand that. But exactly the same could still be said if the rule was applied as I posited in my attempt at calculating things. In other words, I understand why it may make sense to have a rule to disallow certain losses in specific scenarios, and why that could result in higher remaining cost bases than if the rule did not exist. And I realize how it would "net out" to be the same if all shares were sold. But I simply still do not understand how it is logical at all for the cost bases to be higher than any of the actual purchase prices. I can't come up with a coherent rule that would allow for this.

What I'm trying to say is:
buy for $10/share
sell for $5/share
buy for $4/share

Ok, I can see why the loss from the sale might be disallowed, and how the final cost basis might be >$4/share. But I don't see why on earth it should be >$10/share with any logical rules. That is not to say I don't see how it could be >$10/share with the existing rules. But if it is, then I do not think the existing rules are logical. And that is why I am still trying to understand this. I am still trying to reread what others have written here and understand their calculations.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

VartAndelay wrote: Fri Jan 07, 2022 4:33 pm But I simply still do not understand how it is logical at all for the cost bases to be higher than any of the actual purchase prices.

26 USC 1091
If the property consists of stock or securities the acquisition of which (or the contract or option to acquire which) resulted in the nondeductibility (under this section or corresponding provisions of prior internal revenue laws) of the loss from the sale or other disposition of substantially identical stock or securities, then the basis shall be the basis of the stock or securities so sold or disposed of, increased or decreased, as the case may be, by the difference, if any, between the price at which the property was acquired and the price at which such substantially identical stock or securities were sold or otherwise disposed of.
The basis of the purchased shares still remaining is thus adjusted by the disallowed amount. By increasing the basis, you are then allowed to take the section 165 deduction on the disallowed deduction.

The question is sort of like asking how can I have a capital loss.
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

gobel wrote: Fri Jan 07, 2022 4:29 pm
VartAndelay wrote: Thu Jan 06, 2022 7:59 pm The cost basis at that point would be:
[lot 1: ] 10 shares for $10/share
[lot 2a:] 90 shares for $9/share
[lot 2b:] 110 shares for $4/share
It's actually possible in this example to clear out all the wash sales. The key is that shares cannot trigger wash sales on shares within the same lot.

So on Jan 4, first sell lot 1. This will trigger a wash sale onto lot 2b (2a cannot trigger another wash sale so it is skipped). This leads to

lot 2a: 90 shares for $9/share
lot 2b: 10 shares for $11/share
lot 2c: 100 shares for $4/share

Then sell all of lot 2a and 2b and 85 shares from lot 2c. No further wash sales will be triggered, since these are all shares from the same original lot 2. You are left with realized losses of $705 and

lot 2: 15 shares for $4/share
Yes, that is exactly the same conclusion I arrived at and your final numbers match mine exactly. In the portion you are responding to, I was trying to go step-by-step through my calculations, but I think we arrived at identical end results. But it's vastly different than some of the other calculations I'm seeing in here, so I'm still confused.

I'm not saying they are wrong. They may well be correct. But for some reason I'm still having a very hard time wrapping my head around exactly how these rules apply to this scenario. For some reason it's just not intuitive at all to me (unless my original calculations were correct).
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

VartAndelay wrote: Fri Jan 07, 2022 4:33 pm
What I'm trying to say is:
buy for $10/share
sell for $5/share
buy for $4/share

Ok, I can see why the loss from the sale might be disallowed, and how the final cost basis might be >$4/share. But I don't see why on earth it should be >$10/share with any logical rules. That is not to say I don't see how it could be >$10/share with the existing rules. But if it is, then I do not think the existing rules are logical. And that is why I am still trying to understand this. I am still trying to reread what others have written here and understand their calculations.
It's not. The basis is $9.

$10 - $5 = $5 + $4 = $9
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

Lee_WSP wrote: Fri Jan 07, 2022 4:40 pm
VartAndelay wrote: Fri Jan 07, 2022 4:33 pm
What I'm trying to say is:
buy for $10/share
sell for $5/share
buy for $4/share

Ok, I can see why the loss from the sale might be disallowed, and how the final cost basis might be >$4/share. But I don't see why on earth it should be >$10/share with any logical rules. That is not to say I don't see how it could be >$10/share with the existing rules. But if it is, then I do not think the existing rules are logical. And that is why I am still trying to understand this. I am still trying to reread what others have written here and understand their calculations.
It's not. The basis is $9.

$10 - $5 = $5 + $4 = $9
Right, that's totally reasonable and makes sense to me. But some of the other responses are giving results greater (and even much greater) than $10/share (the highest purchase price) for some of the cost bases. If my original calculations were correct, then it makes sense to me. But I've seen multiple, separate responses resulting in >$10/share cost basis, which makes me question if I'm fundamentally misunderstanding things.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

VartAndelay wrote: Fri Jan 07, 2022 4:46 pm
Lee_WSP wrote: Fri Jan 07, 2022 4:40 pm
VartAndelay wrote: Fri Jan 07, 2022 4:33 pm
What I'm trying to say is:
buy for $10/share
sell for $5/share
buy for $4/share

Ok, I can see why the loss from the sale might be disallowed, and how the final cost basis might be >$4/share. But I don't see why on earth it should be >$10/share with any logical rules. That is not to say I don't see how it could be >$10/share with the existing rules. But if it is, then I do not think the existing rules are logical. And that is why I am still trying to understand this. I am still trying to reread what others have written here and understand their calculations.
It's not. The basis is $9.

$10 - $5 = $5 + $4 = $9
Right, that's totally reasonable and makes sense to me. But some of the other responses are giving results greater (and even much greater) than $10/share (the highest purchase price) for some of the cost bases. If my original calculations were correct, then it makes sense to me. But I've seen multiple, separate responses resulting in >$10/share cost basis, which makes me question if I'm fundamentally misunderstanding things.
The wash sale rules are extraordinarily complex and very difficult to even read through, let alone understand. You need to read the code, then the regs, and then probably reread them and go through a few examples before truly understanding how it works.

I really cannot dumb down the code any further than actually working out the math as I did above.

You take the difference between the basis of the lots sold and the amount they sold for (disallowed amount) and then add it to the replacement shares’ basis.

See my previous response quoting the code.
User avatar
gobel
Posts: 438
Joined: Mon Feb 08, 2021 4:50 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by gobel »

VartAndelay wrote: Fri Jan 07, 2022 4:40 pm But it's vastly different than some of the other calculations I'm seeing in here, so I'm still confused.
rkhusky wrote: Fri Jan 07, 2022 2:47 pm It does get complicated if one does it lot by lot. Doing the example more carefully, with putting adjusted shares chronically behind unadjusted shares, I end up with 5 sh @ $11/sh and 10 sh @ $52/sh.
OP, these are typos. Don't get thrown by them.

but yes, it is possible to end up with a wash sale on the remaining 15 shares if you sell things in a different order than what I listed. E.g. if you sell all of lot 2c and 85 from 2a, you will be left with

lot 2a: 5 shares for $9/share
lot 2b: 10 shares for $11/share

and only get to realize $610
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

gobel wrote: Fri Jan 07, 2022 4:55 pm
VartAndelay wrote: Fri Jan 07, 2022 4:40 pm But it's vastly different than some of the other calculations I'm seeing in here, so I'm still confused.
rkhusky wrote: Fri Jan 07, 2022 2:47 pm It does get complicated if one does it lot by lot. Doing the example more carefully, with putting adjusted shares chronically behind unadjusted shares, I end up with 5 sh @ $11/sh and 10 sh @ $52/sh.
OP, these are typos. Don't get thrown by them.

but yes, it is possible to end up with a wash sale on the remaining 15 shares if you sell things in a different order than what I listed. E.g. if you sell all of lot 2c and 85 from 2a, you will be left with

lot 2a: 5 shares for $9/share
lot 2b: 10 shares for $11/share

and only get to realize $610
Is it up to the taxpayer to decide, or does a certain method have to be followed? If it makes any difference, I have used first-in-first-out in the past and assume I would continue using first-in-first-out.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

Deleted
Last edited by Lee_WSP on Sun Jan 09, 2022 7:13 pm, edited 1 time in total.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

VartAndelay wrote: Fri Jan 07, 2022 5:00 pm
gobel wrote: Fri Jan 07, 2022 4:55 pm
VartAndelay wrote: Fri Jan 07, 2022 4:40 pm But it's vastly different than some of the other calculations I'm seeing in here, so I'm still confused.
rkhusky wrote: Fri Jan 07, 2022 2:47 pm It does get complicated if one does it lot by lot. Doing the example more carefully, with putting adjusted shares chronically behind unadjusted shares, I end up with 5 sh @ $11/sh and 10 sh @ $52/sh.
OP, these are typos. Don't get thrown by them.

but yes, it is possible to end up with a wash sale on the remaining 15 shares if you sell things in a different order than what I listed. E.g. if you sell all of lot 2c and 85 from 2a, you will be left with

lot 2a: 5 shares for $9/share
lot 2b: 10 shares for $11/share

and only get to realize $610
Is it up to the taxpayer to decide, or does a certain method have to be followed? If it makes any difference, I have used first-in-first-out in the past and assume I would continue using first-in-first-out.
You cannot decide. The regs clearly state first bought, first adjusted.

https://www.law.cornell.edu/cfr/text/26/1.1091-1
User avatar
gobel
Posts: 438
Joined: Mon Feb 08, 2021 4:50 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by gobel »

Lee_WSP wrote: Fri Jan 07, 2022 5:00 pm It is mathematically impossible to arrive at an adjusted cost basis greater than that of the highest price the shares were bought at.
Lee_WSP wrote: Fri Jan 07, 2022 5:01 pm You cannot decide. The regs clearly state first bought, first adjusted.

https://www.law.cornell.edu/cfr/text/26/1.1091-1
Both of these statements are wrong. OP you can use specid (specific lot identification) instead of FIFO to select which lots to sell (if your broker supports it).
User avatar
iceport
Posts: 5625
Joined: Sat Apr 07, 2007 4:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

I haven't read through all the latest replies, but here's how I see this sequence playing out:

Image

Basically, I agree with the OP's calc's up until he failed to account for the wash sale on 1/4/22.

A loss of $605 can be realized, and the remaining $100 loss is added to the cost basis of the remaining 15 shares.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
Ace1
Posts: 270
Joined: Sun Dec 26, 2010 7:29 pm
Location: Twinsburg Ohio

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Ace1 »

VA
Perhaps this will help you.
You spent $1800, and you eventually get to recover the $1800…
All of it will come back as either sales proceeds or losses at some point in time.

On a unit level, you bought 300 shares and you sold 285 at losses that have been
disallowed or more correctly deferred to some point in the future.
Since you only have 15 shares left, the “unused” or deferred losses on all or some of the 285 shares
are “piled up” on just 15 shares, which results in a much higher per share basis on the remaining shares.

Ace
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

gobel wrote: Fri Jan 07, 2022 5:12 pm
Lee_WSP wrote: Fri Jan 07, 2022 5:00 pm It is mathematically impossible to arrive at an adjusted cost basis greater than that of the highest price the shares were bought at.
Lee_WSP wrote: Fri Jan 07, 2022 5:01 pm You cannot decide. The regs clearly state first bought, first adjusted.

https://www.law.cornell.edu/cfr/text/26/1.1091-1
Both of these statements are wrong. OP you can use specid (specific lot identification) instead of FIFO to select which lots to sell (if your broker supports it).
I thought he was asking the order of basis adjustment, so let's table that because we agree.

The first is not wrong. The basis is adjusted by the difference. Adding back the biggest difference will still never be higher than it ever was.

I showed you the correct math. Show me yours.
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

Ok, after thinking through this some more, I stand corrected on some of my previous thoughts. I now realize how the cost basis could be higher than any of the purchase prices. My rants about how that could only be possible if the rules were illogical were based on some poor intuition on my part. I get it now.

But I'm still not sure whether or not my original calculations were correct. I need to reread some of the responses and go through the numbers again. But I just wanted to clarify that I do see how there could be scenarios where the cost basis is higher than any purchase price (but I'm still not sure if my hypothetical scenario would be one such scenario or not).
Last edited by VartAndelay on Fri Jan 07, 2022 5:27 pm, edited 1 time in total.
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

Here is an example of how the wash sale can create a large adjusted basis:

Buy 10 shares at $1,000/sh (invest $10,000 cash)
1 week later, sell 10 shares at $100/sh (cap loss of $9,000, $900/sh) -> $1,000 cash
1 week later, buy 10 shares at $1,000/sh, creating a wash sale (invest $9,000 more, for a total of $19,000)
End result: 10 shares with a basis of $1,900/sh ($1,000 + $900)

Do it again:
1 week later, sell 10 shares at $100/sh (cap loss of $18,000, $1,800/sh) -> $1,000 cash
1 week later, buy 10 shares at $1,000/sh, creating a wash sale (invest $9,000 more, for a total of $28,000)
End result: 10 shares with a basis of $2,800/sh ($1,000 + $1,800)

Finally, sell 10 shares for $1,000/sh -> $10,000 cash + $18,000 cap loss
Last edited by rkhusky on Fri Jan 07, 2022 5:39 pm, edited 1 time in total.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

Deleted
Last edited by Lee_WSP on Sun Jan 09, 2022 7:12 pm, edited 1 time in total.
FactualFran
Posts: 1594
Joined: Sat Feb 21, 2015 2:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by FactualFran »

VartAndelay wrote: Fri Jan 07, 2022 5:24 pm But I'm still not sure whether or not my original calculations were correct. I need to reread some of the responses and go through the numbers again. But I just wanted to clarify that I do see how there could be scenarios where the cost basis is higher than any purchase price (but I'm still not sure if my hypothetical scenario would be one such scenario or not).
If by "higher than any purchase price", you mean higher than the highest purchase price, then that is in your example when working through the details.

After the sale of 90 shares on Jan. 2, 2022, the remaining shares are:

10 shares bought Oct. 2021 have a cost of $10 per share (purchase price)
90 shares bought Jan. 3, 2022 have an adjusted cost of $9 per share ($4 purchase price + $5 disallowed loss)
110 shares bought Jan. 3, 2022 have a cost of $4 per share (purchase price)

When the sale of 195 shares on Jan. 4, 2022 at $3 per share is processed in FIFO order, the 10 remaining shares of the ones bought Oct. 2021 are sold first. Selling those shares results in a $7 loss per share ($10 cost versus $3 sale price). This is a wash sale due to share bought Jan. 3, 2022. The remaining shares at this point are:

90 shares bought Jan. 3, 2022 have an adjusted cost of $9 per share
10 shares bought Jan. 3, 2022 have an adjusted cost of $11 per share ($4 purchase price + $7 disallowed loss)
100 shares bought Jan. 3, 2022 have a cost of $4 per share (purchase price)

The $11 per share adjusted cost is higher than the highest purchase price of $10.

Processing the remaining 185 shares of the 195 shares sold on Jan. 4, 2022 sells the 10 shares that have an adjusted cost of $11 per share.
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

Deleted
Last edited by Lee_WSP on Sun Jan 09, 2022 7:12 pm, edited 1 time in total.
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

Edit: In below all purchase dates of 1/2 should really be 10/2021 (there were no purchases on 1/2)
Edit: FactualFran provided a reference that shows that shares that have been previously adjusted for a wash sale cannot further be used as replacement shares. Based on that the following calculations are incorrect. An analysis that uses this rule is shown on 1/9/21.

It seems like there is agreement that at the end of 1/3, there are:
(lot 1) 10 shares, basis = $10/sh, purchase date = 1/2
(lot 2) 90 shares, basis = $9/sh, purchase date = 1/2 (holding period adjustment)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3

195 shares to be sold for $3/sh.

If these were ETF's, each step below could be submitted a number of minutes apart on the same day. I don't know whether a brokerage's wash sale algorithm would process the steps in this order.

In a FIFO arrangement, the 10 shares in lot 1 should be sold first, for a loss of $7/sh, which is a wash sale.
The oldest replacement shares are matched first, which are from lot 2. So, 10 shares of lot 2 have their basis adjusted.
This leaves:
185 shares to be sold for $3/sh.

(lot 2a) 80 shares, basis = $9/sh, purchase date = 1/2
(lot 2b) 10 shares, basis = $16/sh, purchase date = 1/2 (basis adjusted by $7/sh)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 2a, for a loss of $6/sh, which is a wash sale.
The replacement shares are the 10 shares from lot 2b plus 70 shares from lot 3, whose basis will be adjusted.

This leaves:
105 shares to be sold for $3/sh.

(lot 2b) 10 shares, basis = $22/sh, purchase date = 1/2, (basis adjusted by $6/sh)
(lot 3a) 70 shares, basis = $10/sh, purchase date = 1/2, (basis adjusted by $6/sh) (holding period adjustment)
(lot 3b) 40 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 2b, for a loss of $19/sh, which is a wash sale.
The replacement shares are 10 shares from lot 3a, whose basis will be adjusted.

This leaves:
95 shares to be sold for $3/sh.

(lot 3a-1) 60 shares, basis = $10/sh, purchase date = 1/2
(lot 3a-2) 10 shares, basis = $29/sh, purchase date = 1/2, (basis adjusted by $19/sh)
(lot 3b) 40 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 3a-1, for a loss of $7/sh, which is a partial wash sale.
The replacement shares are the 10 shares from lot 3a-2 and the 40 shares from lot 3b, whose basis will be adjusted.

This leaves:
35 shares to be sold for $3/sh.

(lot 3a-2) 10 shares, basis = $36/sh, purchase date = 1/2, (basis adjusted by $7/sh)
(lot 3b) 40 shares, basis = $11/sh, purchase date = 1/2, (basis adjusted by $7/sh) (holding period adjustment)


Next sell lot 3a-2, for a loss of $33/sh, which is a wash sale.
The replacement shares are 10 shares from lot 3b, whose basis will be adjusted.

This leaves:
25 shares to be sold for $3/sh.

(lot 3b-1) 30 shares, basis = $11/sh, purchase date = 1/2,
(lot 3b-2) 10 shares, basis = $44/sh, purchase date = 1/2, (basis adjusted by $33/sh)


Finally, sell 25 shares from lot 3b-1, for a loss of $8/sh, which is a partial wash sale.
The replacement shares are the 10 shares from lot 3b-2, whose basis will be adjusted.

This leaves:
0 shares to be sold.

(lot 3b-1) 5 shares, basis = $11/sh, purchase date = 1/2,
(lot 3b-2) 10 shares, basis = $52/sh, purchase date = 1/2, (basis adjusted by $8/sh)
Last edited by rkhusky on Sun Jan 09, 2022 3:50 pm, edited 6 times in total.
an_asker
Posts: 3825
Joined: Thu Jun 27, 2013 2:15 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by an_asker »

VartAndelay wrote: Fri Jan 07, 2022 4:23 pm [...]
Thanks, these numbers were hypothetical as my exact situation is a bit different. I have a lot more trades and different cost bases to keep track off, so I used a simplified example that I should be able to extrapolate to my own.

But as I mentioned, while I do not rule out it being possible, it still seems bizarre and a result of an illogical rule to have the remaining cost bases be higher (let alone significantly higher!) than any of the actual share purchase prices. That just doesn't make any sense to me.
That is exactly the point of the wash sales rule. In the first case, because of frequent trading, you are disallowed from claiming the losses you are otherwise permitted to. To make you whole, you get to claim those losses (or reduce future gains) by inflating the purchase price of your remaining shares. What the government takes away from you now, it will give back to you later.

You do realize that the inflated cost price of the remaining shares will be advantageous to you down the line, don't you?
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

rkhusky wrote: Fri Jan 07, 2022 10:48 pm It seems like there is agreement that at the end of 1/3, there are:
(lot 1) 10 shares, basis = $10/sh, purchase date = 1/2
(lot 2) 90 shares, basis = $9/sh, purchase date = 1/2 (holding period adjustment)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3

195 shares to be sold for $3/sh.

If these were ETF's, each step below could be submitted a number of minutes apart on the same day.

In a FIFO arrangement, the 10 shares in lot 1 should be sold first, for a loss of $7/sh, which is a wash sale.
The oldest replacement shares are matched first, which are from lot 2. So, 10 shares of lot 2 have their basis adjusted.
This leaves:
185 shares to be sold for $3/sh.

(lot 2a) 80 shares, basis = $9/sh, purchase date = 1/2
(lot 2b) 10 shares, basis = $16/sh, purchase date = 1/2 (basis adjusted by $7/sh)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 2a, for a loss of $6/sh, which is a wash sale.
The replacement shares are the 10 shares from lot 2b plus 70 shares from lot 3, whose basis will be adjusted.

This leaves:
105 shares to be sold for $3/sh.

(lot 2b) 10 shares, basis = $22/sh, purchase date = 1/2, (basis adjusted by $6/sh)
(lot 3a) 70 shares, basis = $10/sh, purchase date = 1/2, (basis adjusted by $6/sh) (holding period adjustment)
(lot 3b) 40 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 2b, for a loss of $19/sh, which is a wash sale.
The replacement shares are 10 shares from lot 3a, whose basis will be adjusted.

This leaves:
95 shares to be sold for $3/sh.

(lot 3a-1) 60 shares, basis = $10/sh, purchase date = 1/2
(lot 3a-2) 10 shares, basis = $29/sh, purchase date = 1/2, (basis adjusted by $19/sh)
(lot 3b) 40 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 3a-1, for a loss of $7/sh, which is a partial wash sale.
The replacement shares are the 10 shares from lot 3a-2 and the 40 shares from lot 3b, whose basis will be adjusted.

This leaves:
35 shares to be sold for $3/sh.

(lot 3a-2) 10 shares, basis = $36/sh, purchase date = 1/2, (basis adjusted by $7/sh)
(lot 3b) 40 shares, basis = $11/sh, purchase date = 1/2, (basis adjusted by $7/sh) (holding period adjustment)


Next sell lot 3a-2, for a loss of $33/sh, which is a wash sale.
The replacement shares are 10 shares from lot 3b, whose basis will be adjusted.

This leaves:
25 shares to be sold for $3/sh.

(lot 3b-1) 30 shares, basis = $11/sh, purchase date = 1/2,
(lot 3b-2) 10 shares, basis = $44/sh, purchase date = 1/2, (basis adjusted by $33/sh)


Finally, sell 25 shares from lot 3b-1, for a loss of $8/sh, which is a partial wash sale.
The replacement shares are the 10 shares from lot 3b-2, whose basis will be adjusted.

This leaves:
0 shares to be sold.

(lot 3b-1) 5 shares, basis = $11/sh, purchase date = 1/2,
(lot 3b-2) 10 shares, basis = $52/sh, purchase date = 1/2, (basis adjusted by $8/sh)
This doesn't seem right to me. Would you mind also listing what you'd calculate for the overall capital gains and/or capital losses in this scenario?
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

an_asker wrote: Fri Jan 07, 2022 10:51 pm
VartAndelay wrote: Fri Jan 07, 2022 4:23 pm [...]
Thanks, these numbers were hypothetical as my exact situation is a bit different. I have a lot more trades and different cost bases to keep track off, so I used a simplified example that I should be able to extrapolate to my own.

But as I mentioned, while I do not rule out it being possible, it still seems bizarre and a result of an illogical rule to have the remaining cost bases be higher (let alone significantly higher!) than any of the actual share purchase prices. That just doesn't make any sense to me.
That is exactly the point of the wash sales rule. In the first case, because of frequent trading, you are disallowed from claiming the losses you are otherwise permitted to. To make you whole, you get to claim those losses (or reduce future gains) by inflating the purchase price of your remaining shares. What the government takes away from you now, it will give back to you later.

You do realize that the inflated cost price of the remaining shares will be advantageous to you down the line, don't you?
I do and always did realize that. My intuition was a bit more nuanced, but maybe I did not express it clearly. Nonetheless I did ultimately realize the flaw in my intuition and understand now how the cost basis price per share could end up higher than the greatest purchase price per share. But I'm still not convinced that my original attempt in calculating how this scenario would be treated for taxes is wrong, but the several responses conflicting with mine are giving me pause. I'm still trying to work through the conflicting responses.
rkhusky
Posts: 11425
Joined: Thu Aug 18, 2011 8:09 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by rkhusky »

VartAndelay wrote: Fri Jan 07, 2022 10:54 pm This doesn't seem right to me. Would you mind also listing what you'd calculate for the overall capital gains and/or capital losses in this scenario?
The non-washed cap losses are $70 from the sale of lot 3a-1 and $120 from the sale of lot 3b-2 for a total $190.
The remaining shares are worth $55 + $520 = $575.
The total is $575 + $190 = $765.
an_asker
Posts: 3825
Joined: Thu Jun 27, 2013 2:15 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by an_asker »

VartAndelay wrote: Fri Jan 07, 2022 10:57 pm [...]
But I'm still not convinced that my original attempt in calculating how this scenario would be treated for taxes is wrong, but the several responses conflicting with mine are giving me pause. I'm still trying to work through the conflicting responses.
No worries. There were a lot of responses with too much maths (and complicated stuff), so I gave up too lol.

I had recently presented a simple example. Yours is more complex though...
Last edited by an_asker on Fri Jan 07, 2022 11:08 pm, edited 1 time in total.
Topic Author
VartAndelay
Posts: 138
Joined: Tue Mar 03, 2015 11:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by VartAndelay »

rkhusky wrote: Fri Jan 07, 2022 11:02 pm
VartAndelay wrote: Fri Jan 07, 2022 10:54 pm This doesn't seem right to me. Would you mind also listing what you'd calculate for the overall capital gains and/or capital losses in this scenario?
The non-washed cap losses are $70 from the sale of lot 3a-1 and $120 from the sale of lot 3b-2 for a total $190.
The remaining shares are worth $55 + $520 = $575.
The total is $575 + $190 = $765.
Ok, that does at least seem possible then, as the numbers do match. I need to think this through some more.
User avatar
iceport
Posts: 5625
Joined: Sat Apr 07, 2007 4:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

rkhusky wrote: Fri Jan 07, 2022 10:48 pm In a FIFO arrangement, the 10 shares in lot 1 should be sold first, for a loss of $7/sh, which is a wash sale.
The oldest replacement shares are matched first, which are from lot 2. So, 10 shares of lot 2 have their basis adjusted.
This leaves:
185 shares to be sold for $3/sh.

(lot 2a) 80 shares, basis = $9/sh, purchase date = 1/2
(lot 2b) 10 shares, basis = $16/sh, purchase date = 1/2 (basis adjusted by $7/sh)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3
Well, there certainly seems to be a lot of discord here. It seems I'm alone in thinking this way, but I think several of you have it wrong on which shares are replacement shares. The above is an example.

Here there is an attempt to match the oldest wash sale shares with oldest replacement shares. Where the flaw is, in my view, is that you are treating liquidated shares as replacement shares. They're not replacement shares, because they were sold at the same time as the shares they are supposed to be replacing. That makes absolutely no sense.

In reality, there are only 15 replacement shares after the last sale. Those last 15 shares are the only reason the last sale is a partial wash sale. Wash shares match with replacement shares, not shares that the investor no longer owns!

So the 15 oldest shares sold on 1/4 become wash shares, and they match with the replacement shares. The last 10 of the remaining shares bought in October 2021 are obviously the oldest. The next oldest would be 5 of the 90 shares bought on 1/3 that had their cost basis and holding period adjusted.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
User avatar
iceport
Posts: 5625
Joined: Sat Apr 07, 2007 4:29 pm

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by iceport »

VartAndelay wrote: Fri Jan 07, 2022 10:57 pm But I'm still not convinced that my original attempt in calculating how this scenario would be treated for taxes is wrong, but the several responses conflicting with mine are giving me pause. I'm still trying to work through the conflicting responses.
I don't think you were wrong, as far as you got. Your logic and arithmetic seem fine to me. The only mistake you made was not accounting for the fact that the last 15 shares remaining at the end of it all were bought within the 61-day wash sale period, so they create a partial wash sale.

People seem to be trying to simulate a computer algorithm in "processing" sales. In the process, they are making what's already confusing enough on it's own even more confusing.
"Discipline matters more than allocation.” |—| "In finance, if you’re certain of anything, you’re out of your mind." ─William Bernstein
User avatar
Lee_WSP
Posts: 6723
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: Really confused about how disallowed losses are supposed to be treated for taxes and cost basis

Post by Lee_WSP »

rkhusky wrote: Fri Jan 07, 2022 10:48 pm It seems like there is agreement that at the end of 1/3, there are:
(lot 1) 10 shares, basis = $10/sh, purchase date = 1/2
(lot 2) 90 shares, basis = $9/sh, purchase date = 1/2 (holding period adjustment)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3

195 shares to be sold for $3/sh.

If these were ETF's, each step below could be submitted a number of minutes apart on the same day. I don't know whether a brokerage's wash sale algorithm would process the steps in this order.

In a FIFO arrangement, the 10 shares in lot 1 should be sold first, for a loss of $7/sh, which is a wash sale.
The oldest replacement shares are matched first, which are from lot 2. So, 10 shares of lot 2 have their basis adjusted.
This leaves:
185 shares to be sold for $3/sh.

(lot 2a) 80 shares, basis = $9/sh, purchase date = 1/2
(lot 2b) 10 shares, basis = $16/sh, purchase date = 1/2 (basis adjusted by $7/sh)
(lot 3) 110 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 2a, for a loss of $6/sh, which is a wash sale.
The replacement shares are the 10 shares from lot 2b plus 70 shares from lot 3, whose basis will be adjusted.

This leaves:
105 shares to be sold for $3/sh.

(lot 2b) 10 shares, basis = $22/sh, purchase date = 1/2, (basis adjusted by $6/sh)
(lot 3a) 70 shares, basis = $10/sh, purchase date = 1/2, (basis adjusted by $6/sh) (holding period adjustment)
(lot 3b) 40 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 2b, for a loss of $19/sh, which is a wash sale.
The replacement shares are 10 shares from lot 3a, whose basis will be adjusted.

This leaves:
95 shares to be sold for $3/sh.

(lot 3a-1) 60 shares, basis = $10/sh, purchase date = 1/2
(lot 3a-2) 10 shares, basis = $29/sh, purchase date = 1/2, (basis adjusted by $19/sh)
(lot 3b) 40 shares, basis = $4/sh, purchase date = 1/3


Next sell lot 3a-1, for a loss of $7/sh, which is a partial wash sale.
The replacement shares are the 10 shares from lot 3a-2 and the 40 shares from lot 3b, whose basis will be adjusted.

This leaves:
35 shares to be sold for $3/sh.

(lot 3a-2) 10 shares, basis = $36/sh, purchase date = 1/2, (basis adjusted by $7/sh)
(lot 3b) 40 shares, basis = $11/sh, purchase date = 1/2, (basis adjusted by $7/sh) (holding period adjustment)


Next sell lot 3a-2, for a loss of $33/sh, which is a wash sale.
The replacement shares are 10 shares from lot 3b, whose basis will be adjusted.

This leaves:
25 shares to be sold for $3/sh.

(lot 3b-1) 30 shares, basis = $11/sh, purchase date = 1/2,
(lot 3b-2) 10 shares, basis = $44/sh, purchase date = 1/2, (basis adjusted by $33/sh)


Finally, sell 25 shares from lot 3b-1, for a loss of $8/sh, which is a partial wash sale.
The replacement shares are the 10 shares from lot 3b-2, whose basis will be adjusted.

This leaves:
0 shares to be sold.

(lot 3b-1) 5 shares, basis = $11/sh, purchase date = 1/2,
(lot 3b-2) 10 shares, basis = $52/sh, purchase date = 1/2, (basis adjusted by $8/sh)
I'm lost as to where you've got lot 1 and lots 2a and b.

On January 3rd there is only one lot of 90 washed shares with an adjusted basis of 9 (5 + 4)

Which leaves 10 older shares with a basis of $10 and 100? Newer shares with a basis of $4

At the end of it all, only 200 replacement shares were purchased, so there aren't all that many washed shares.
Post Reply