Partial Wash Sale from Reinvested Dividends?

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justsomeguy2018
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Partial Wash Sale from Reinvested Dividends?

Post by justsomeguy2018 » Thu Mar 26, 2020 10:29 pm

Hello,

I sold off an investment the other day, it had various lots - some lots were a loss, some were a gain, overall my gain when I sold was $4.

My disposal method is "First In First Out", not sure if that matters.

The last lot was a dividend reinvestment of $1.64 on 03/06.

Actually forget this real world example and let me use a hypothetical example, I am basically trying to understand how a partial wash sale works.

Hypothetical example:

Buy 1 share of stock X at $10 on Jan 28th.

$1 dividend per share, reinvested on Feb 28th, price happens to be exactly the same that day, buys .10 shares.

Price drops to $5, you sell on Mar 6th, 5 x 1.1 = $5.50, loss of $5.50.

Because of the reinvested dividends on Feb. 28th, you have a wash sale, but does that mean you can't deduct any of the $5.50 loss? Or does it only disallow the loss on the .1 share that was bought with dividend reinvestment, so you can claim the loss on the remaining shares?

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iceport
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Re: Partial Wash Sale from Reinvested Dividends?

Post by iceport » Thu Mar 26, 2020 10:44 pm

Actually, there is no wash sale provided you sold everything — including the 0.1 share purchased within the wash sale period — at the same time, with the same order. The 0.1 share isn't a replacement share, because it can't replace itself. Good explanation by way of examples is here: https://fairmark.com/investment-taxatio ... ent-stock/
"Discipline matters more than allocation.” ─William Bernstein

Topic Author
justsomeguy2018
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Re: Partial Wash Sale from Reinvested Dividends?

Post by justsomeguy2018 » Thu Mar 26, 2020 10:58 pm

iceport wrote:
Thu Mar 26, 2020 10:44 pm
Actually, there is no wash sale provided you sold everything — including the 0.1 share purchased within the wash sale period — at the same time, with the same order. The 0.1 share isn't a replacement share, because it can't replace itself. Good explanation by way of examples is here: https://fairmark.com/investment-taxatio ... ent-stock/
Thanks. I don't know why I struggle so much with TLH understanding....

But in my case the fractional shares did not get sold because this was an ETF and only whole shares were sold....the fractional shares are waiting to be liquidated into my core holding, I guess....

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iceport
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Re: Partial Wash Sale from Reinvested Dividends?

Post by iceport » Thu Mar 26, 2020 11:09 pm

Well, then I guess you really do have a wash sale. So the sale of the first 1.0 share would include a partial wash sale on 0.1 share. The associated loss of $0.50 would be disallowed (you would still be able to claim a loss of $4.50 on the sale), and that would get added to the cost basis of the 0.1 replacement share, for a new cost basis of $1.00 + $0.50 = $1.50. When that 0.1 share is sold, you'll be selling 0.1 share with an adjusted cost basis of $1.50, so then the formerly disallowed loss would be realized.
"Discipline matters more than allocation.” ─William Bernstein

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justsomeguy2018
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Re: Partial Wash Sale from Reinvested Dividends?

Post by justsomeguy2018 » Thu Mar 26, 2020 11:42 pm

iceport wrote:
Thu Mar 26, 2020 11:09 pm
Well, then I guess you really do have a wash sale. So the sale of the first 1.0 share would include a partial wash sale on 0.1 share. The associated loss of $0.50 would be disallowed (you would still be able to claim a loss of $4.50 on the sale), and that would get added to the cost basis of the 0.1 replacement share, for a new cost basis of $1.00 + $0.50 = $1.50. When that 0.1 share is sold, you'll be selling 0.1 share with an adjusted cost basis of $1.50, so then the formerly disallowed loss would be realized.
Thanks, this is helpful. I may be misunderstanding, but are you saying that when you eventually sell the 0.1 share, you are actually able to still deduct the loss eventually, since it was added to the cost basis?

On a similar note, I am guessing partial wash sales would work the same way if, say, reinvested dividends occurred in a different account?

Example, same parameters as my previous example, but let's say in the taxable account you do not reinvest the dividend - but in an IRA account you have the same holding, and the $1 dividend does get reinvested. Would this basically be a partial wash sale identical to the initial scenario?

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iceport
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Re: Partial Wash Sale from Reinvested Dividends?

Post by iceport » Fri Mar 27, 2020 12:06 am

justsomeguy2018 wrote:
Thu Mar 26, 2020 11:42 pm
iceport wrote:
Thu Mar 26, 2020 11:09 pm
Well, then I guess you really do have a wash sale. So the sale of the first 1.0 share would include a partial wash sale on 0.1 share. The associated loss of $0.50 would be disallowed (you would still be able to claim a loss of $4.50 on the sale), and that would get added to the cost basis of the 0.1 replacement share, for a new cost basis of $1.00 + $0.50 = $1.50. When that 0.1 share is sold, you'll be selling 0.1 share with an adjusted cost basis of $1.50, so then the formerly disallowed loss would be realized.
Thanks, this is helpful. I may be misunderstanding, but are you saying that when you eventually sell the 0.1 share, you are actually able to still deduct the loss eventually, since it was added to the cost basis?

On a similar note, I am guessing partial wash sales would work the same way if, say, reinvested dividends occurred in a different account?

Example, same parameters as my previous example, but let's say in the taxable account you do not reinvest the dividend - but in an IRA account you have the same holding, and the $1 dividend does get reinvested. Would this basically be a partial wash sale identical to the initial scenario?
Yes to your first question in a taxable account. An emphatic no to your second question when the replacement shares are in a tax-advantaged account. The cost basis adjustment is not allowed in a tax-advantaged account, so the loss would be disallowed permanently.

The first five of the articles here are really worth a read: https://fairmark.com/investment-taxatio ... gain/wash/
"Discipline matters more than allocation.” ─William Bernstein

livesoft
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Re: Partial Wash Sale from Reinvested Dividends?

Post by livesoft » Fri Mar 27, 2020 5:23 am

Tell us after looking at what your brokerage firm overnight did: What happened to the fractional share? Did the brokerage adjust its cost basis for a wash sale? Who is your broker?
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