Can wash sales generate a prior-year capital loss?

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Topic Author
telemetry
Posts: 5
Joined: Mon Feb 11, 2019 4:23 pm

Can wash sales generate a prior-year capital loss?

Post by telemetry » Mon Feb 11, 2019 4:43 pm

I have sold a bunch of company stock from RSU grants and ESPP sales and have been trying to wrap my head around how to report the cost basis for those securities.

Here is one area which has felt weird:

Let's say I had some RSUs vest 12/27/2018 (granted 5 years ago). 300 shares vested, and 90 were immediately sold to cover taxes @ $9/share by my brokerage at the time of vesting.

I sold all 210 shares @ $9/share on 12/28/2018.

Next, I had another 300 shares vest (from a different grant) on 1/15/2019. 1000 shares vested at $9.50/share, of which 300 were immediately sold to cover taxes @ 9.50/share by my brokerage and the other 700 were transferred to my brokerage account.

I sold all all 700 shares @ $9/share on 1/16/2019.

I had no further trading activity for the rest of 2019.

Normally I would think that the Jan 2019 sale generated a $0.50/share capital loss for 700 shares.

But because there was a "purchase" (if RSU grants are considered purchases -- see e.g. viewtopic.php?t=124033 or e.g. https://money.stackexchange.com/questio ... sting-date ) within 30 days of the 1/16/2019 sale, it actually seems like I have a wash sale.

My broker won't report this wash sale; their form 1099B will report my cost basis as $0 for the RSU shares (!) and a supplementary form will say that my adjusted cost basis is $9/share for the 12/2018 ones and $9.50/share for the 1/2019 ones, but the supplementary form won't attempt to adjust the suggested correct cost basis for wash-sale purposes. I need to adjust my cost basis when I report these sales to avoid overpaying taxes, but I also need to be mindful of the wash-sale rule. I have read Publication 550 and I think I know what to do here, but it seems a little odd.

In this contrived example:

(1) Do I have a disallowed $0.50/share capital loss for 2019 for some shares because of wash-sale rules?
(2) Do I consider the 300 shares which vested in Dec 2018 to be "replacement shares"? Or just the 210 of them which I actually received (since 90 were bought and immediately sold on my behalf at time of vesting?)
(3) Then how much disallowed loss do I have for 2019 -- 210 shares' worth or 300 shares' worth?
(4) And do I adjust the cost basis of my 2018 RSU sale by $0.50/share for 210 shares?
(5) And how do I report the adjusted cost basis of my 2018 RSU sale for the 90 share that the brokerage immediately sold on my behalf at vesting time? This sale isn't even reported on a Form 1099B; it only appears on a "confirmation of release" that itemizes shares released & shares traded along with the tax withholding done on my behalf from the share sale. I haven't been reporting those sales that happen during RSU release because normally they have no effect on tax owed.

I think my best answers are:

* The 2019 sale has disallowed capital loss of $0.50/share for 300 shares and an allowed capital loss of $0.50/share for 700 shares.

* The 2018 sale of 210 shares has an extra $0.50/share of cost basis and I thus have a capital loss in 2018 based on choices I made in 2019, which seems ... surprising.

* The 2018 sale of 90 shares has an extra $0.50/share of cost basis which I will report by reporting an extra sale of 90 shares that I would not normally have reported which does not appear on my brokerage's Form 1099B for 2018, and I have a capital loss from that sale.

It feels a little odd that my choices in 2019 can affect my taxes owed for 2018 but that seems to be the implication of this rule.

Topic Author
telemetry
Posts: 5
Joined: Mon Feb 11, 2019 4:23 pm

Re: Can wash sales generate a prior-year capital loss?

Post by telemetry » Mon Feb 11, 2019 8:56 pm

Or, simpler:

Suppose you buy 100 shares of MSFT on Dec 27 2018 @ $101 then reconsider your position and sell them on Dec 28 2018 @ $101.

Suppose you also owned 1000 shares of MSFT that you bought in August 2018 @ $110/share, and you sell it on Jan 2 2019 @ $100/share.

That's a $10/share capital loss but it's only allowable for 900 shares; your Dec 2018 purchases constitute a purchase of replacement shares and you get to adjust their cost basis to $110/share.

In other words, on Jan 1 2019 you have $0 in capital losses from your MSFT sale, but after the Jan 2 wash sale you have $1000 in capital losses for the 2018 tax year. This is a surprising result -- I'm surprised that you can generate capital losses after the end of the calendar year, if I understand the rules right.

nolesrule
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Re: Can wash sales generate a prior-year capital loss?

Post by nolesrule » Mon Feb 11, 2019 10:19 pm

telemetry wrote:
Mon Feb 11, 2019 8:56 pm
Or, simpler:

Suppose you buy 100 shares of MSFT on Dec 27 2018 @ $101 then reconsider your position and sell them on Dec 28 2018 @ $101.

Suppose you also owned 1000 shares of MSFT that you bought in August 2018 @ $110/share, and you sell it on Jan 2 2019 @ $100/share.

That's a $10/share capital loss but it's only allowable for 900 shares; your Dec 2018 purchases constitute a purchase of replacement shares and you get to adjust their cost basis to $110/share.

In other words, on Jan 1 2019 you have $0 in capital losses from your MSFT sale, but after the Jan 2 wash sale you have $1000 in capital losses for the 2018 tax year. This is a surprising result -- I'm surprised that you can generate capital losses after the end of the calendar year, if I understand the rules right.
The Jan 2 2019 sale is not a wash, because at the time of the sale you no longer owned the shares purchased on Dec 27.

Topic Author
telemetry
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Joined: Mon Feb 11, 2019 4:23 pm

Re: Can wash sales generate a prior-year capital loss?

Post by telemetry » Tue Feb 12, 2019 1:47 am

nolesrule wrote:
Mon Feb 11, 2019 10:19 pm
The Jan 2 2019 sale is not a wash, because at the time of the sale you no longer owned the shares purchased on Dec 27.
Hmm, I can't find that exception in publication 550. Is there another IRS rulebook that explains a carve-out to the wash sale rule when you stop owning the security before the wash sale? Would that carve-out also apply to options which expire worthless before a wash sale?

I'm going by https://www.irs.gov/publications/p550#e ... k100010601 which says in part
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:

1. Buy substantially identical stock or securities,

...

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.
The way I read this, if you sell 100 MSFT on Jan 2 2019 at $100 for a $10/share capital loss; and you bought and sold 100 MSFT in late December 2018 at $100 for a $0 capital gain, then you certainly bought substantially identical stock or securities within 30 days of a sale which had a loss. Then either:

* the Jan 2019 sale is a wash sale and you have $1000 of disallowed loss to apply to the cost basis for the Dec 2018 sale, creating a prior year $1000 capital loss (which seems weird because actions in 2019 have now affected tax obligations in 2018)

or

* perhaps the Jan 2019 sale is not a wash sale because even though you bought substantially identical stock before 2019, you sold that same stock later (???? does the IRS say this somewhere in some other publication??)

or

* the Jan 2019 sale is a wash sale and your $1000 of capital loss cannot be applied to the cost basis of a transaction in the past (is there any IRS publication that says that this can't happen?).

I thought the solution might lie somewhere in the matching algorithm they propose for wash sales:
More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

Example 1.
You bought 100 shares of M stock on September 21, 2016, for $5,000. On December 14, 2016, you bought 50 shares of substantially identical stock for $2,750. On December 21, 2016, you bought 25 shares of substantially identical stock for $1,125. On January 4, 2017, you sold for $4,000 the 100 shares you bought in September. You have a $1,000 loss on the sale. However, because you bought 75 shares of substantially identical stock within 30 days before the sale, you cannot deduct the loss ($750) on 75 shares. You can deduct the loss ($250) on the other 25 shares. The basis of the 50 shares bought on December 14, 2016, is increased by two-thirds (50 ÷ 75) of the $750 disallowed loss. The new basis of those shares is $3,250 ($2,750 + $500). The basis of the 25 shares bought on December 21, 2016, is increased by the rest of the loss to $1,375 ($1,125 + $250).
In their example, they say that selling stock in January can increase the cost basis of stock you bought in the previous year. They do not, however, extend the example to show whether selling stock in January can *create extra capital loss* for sales of stock you bought and sold in the previous year -- though they get very close to it. Hrm.

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Earl Lemongrab
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Re: Can wash sales generate a prior-year capital loss?

Post by Earl Lemongrab » Tue Feb 12, 2019 1:33 pm

You're supposed to adjust the basis of the replacement shares. How can you do that when you don't have them anymore?

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