A wash sale occurs when you sell or trade stock, mutual fund shares, or bonds at a loss and, within 30 days before or after the day of the sale:
You purchase substantially identical stock or shares.
You acquire substantially identical stock or securities in a fully taxable trade.
You acquire a contract or option to buy substantially identical stock or securities.
You acquire substantially identical stock for an IRA (traditional or Roth).
If this occurs, you aren’t allowed to recognize the loss on your tax return.
The purpose of the wash-sale rules is to prevent people from selling investments and then buying the same stock back for the sole purpose of creating a deductible loss, or using the loss to offset other shares that you sold for a gain. Gain on a wash sale is taxable as usual. Loss on a wash sale is not currently deductible.
Unfortunately, situations in which a stock or mutual fund is sold at a loss and then repurchased within 30 days aren’t always done with the intent to claim the losses. For example, if you sell shares of a mutual fund in which you have dividends reinvested, you could have a wash sale. This is especially true for mutual funds or stock that pay monthly dividends.
When calculating basis, you add the amount of the disallowed loss to the basis of the shares that caused the wash sale (the acquired shares). By doing this, the loss is deferred, not totally disallowed.
Example: You purchases 100 shares of company stock on May 9, 2005. On June 7, 2010, you sold the stock for a loss of $500. On June 17, 2010, you purchased another 150 shares of the same company's stock for $6,000. Because 100 of the shares you purchased were identical to 100 of the shares you sold, you can't deduct the $500 loss. However, you can add the loss ($500) to the basis of the 100 new shares ($4,000) that you purchased. This means that 100 of the new shares now have a basis of $4,500, and the remaining 50 shares have a basis of $2,000. The holding period of the 100 shares begins on May 9, 2005 (the date that you purchased the original shares). The holding period of the remaining shares begins on June 17, 2010.
If you sell stock at a loss and your spouse or a corporation that you control purchases the same stock within the 30 days before and after the date of the sale, you also have a wash sale. In addition, if you purchase fewer shares of stock or securities than you sold, then only the number of shares that you purchased are subject to the wash-sale rules.
Example: You purchased 100 shares of company stock on October 25, 2007 for $4,000. You then purchased 75 shares of the same company's stock on January 20, 2010 for $1,500. On February 11, 2010, you sold the 100 shares that you purchased in October 2007 for $3,000, and realized a $1,000 loss on the sale. Because you purchased only 75 shares of the same stock within the 30-day period prior to the sale, you can’t deduct the loss on 75 shares of the stock that you sold. However, you can deduct the loss for the other 25 shares that you sold (25/100 = 1/4). This means that you can report a loss of $250 on your tax return:
$1,000 (Loss) / 4 = $250
And you can increase your basis in the new shares by 3/4 (75 / 100), or $750:
$250 (1/4 of the loss) X 3 = $750
This means that the basis of the stock that you purchased in January 2010 is now $2,250:
$1,500 (Purchase price of new shares) + $750 (Amount of the disallowed loss) = $2,250
You report wash sales on Schedule D. Enter the full amount of the loss in column (f) on either line 1 or line 8. On the following line, enter "Wash Sale" in column (a), and then enter the amount of the disallowed loss as a positive amount in column (f). For any shares that you sold that are not subject to the wash sale rules, report that sale as usual.
The H&R Block software takes care of this calculation in the interview for Sales of Stocks, Bonds, Mutual Funds, and Other Investment Property. When you’re asked for the type of sale, select Wash Sale, and then indicate whether it was a full (100%) or partial sale. If you enter the information for the wash sale directly on the Capital Gains and Losses Worksheet, make sure to select the Wash Sales box and indicate the amount of the loss subject to the wash sale (even if it’s 100%).
For more information about what is considered an identical stock or security, see IRS Publication 550, Investment Income and Expenses.