The IRS created the "wash sale" rule to prevent investors from recognizing artificial losses by first selling a security for a loss and then repurchasing the same security within a short period of time.
A wash sale is a double transaction on "substantially similar" securities in a 61-day window. The 61 days includes the date of the trade plus 30 days before and 30 days after. This means that if you hold a stock, buy additional shares and sell it for a loss within 30 days of the replacement purchase, or you sell stock you own at a loss and then repurchase it within 30 days of the sale loss, your trade is considered a wash sale.
Wash Sales & Cost Basis
For example, say you purchase 100 shares of XYZ for $25 per share on Feb. 10. Nine days later, on Feb. 19, XYZ drops to $22 per share and you sell your 100 shares. You have a capital loss of $3 per share, or $300, which may be tax-deductible. If on Feb. 26 you bought the same security for $22.50 per share, this would be considered a wash sale because you sold and repurchased shares of the same stock within only a few days. Without the wash sale rule, the result would be that you could possibly have a tax deduction for your loss, but you would still own the shares, which is why it's sometimes called an "artificial" loss.
With the wash sale rule in place, the loss is deferred until the replacement shares are sold. In this example, that means your $300 loss would be added to your cost basis on the shares you repurchased on Feb. 26 to get an accurate capital gain/loss figure when you sell those shares.
Normally, your cost basis is the total amount of money you have invested in the stock, calculated by multiplying the per-share price by the number of shares purchased. For the Feb. 26 purchase, your normal cost basis would be $2,250 ($22.50 x 100). However, because the purchase was part of a wash sale, your cost basis would have to include your previous losses from the 100 shares sold on Feb. 19, making it $2,550 ($2,250 + $300). Thus, when you sell the replacement shares of XYZ, you will have to calculate your capital gains or losses using $2,550 as your cost basis to account for your previous losses. A higher cost basis may potentially be beneficial in the future from a tax perspective because any capital gains will appear lower and capital losses will appear higher.
A wash sale is a double transaction on "substantially similar" securities in a 61-day window. The 61 days includes the date of the trade plus 30 days before and 30 days after. This means that if you hold a stock, buy additional shares and sell it for a loss within 30 days of the replacement purchase, or you sell stock you own at a loss and then repurchase it within 30 days of the sale loss, your trade is considered a wash sale.
Wash Sales & Cost Basis
For example, say you purchase 100 shares of XYZ for $25 per share on Feb. 10. Nine days later, on Feb. 19, XYZ drops to $22 per share and you sell your 100 shares. You have a capital loss of $3 per share, or $300, which may be tax-deductible. If on Feb. 26 you bought the same security for $22.50 per share, this would be considered a wash sale because you sold and repurchased shares of the same stock within only a few days. Without the wash sale rule, the result would be that you could possibly have a tax deduction for your loss, but you would still own the shares, which is why it's sometimes called an "artificial" loss.
With the wash sale rule in place, the loss is deferred until the replacement shares are sold. In this example, that means your $300 loss would be added to your cost basis on the shares you repurchased on Feb. 26 to get an accurate capital gain/loss figure when you sell those shares.
Normally, your cost basis is the total amount of money you have invested in the stock, calculated by multiplying the per-share price by the number of shares purchased. For the Feb. 26 purchase, your normal cost basis would be $2,250 ($22.50 x 100). However, because the purchase was part of a wash sale, your cost basis would have to include your previous losses from the 100 shares sold on Feb. 19, making it $2,550 ($2,250 + $300). Thus, when you sell the replacement shares of XYZ, you will have to calculate your capital gains or losses using $2,550 as your cost basis to account for your previous losses. A higher cost basis may potentially be beneficial in the future from a tax perspective because any capital gains will appear lower and capital losses will appear higher.
