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100 shares of XYZ are purchased at n = $40/share on 06/01/2001.

100 shares of XYZ are purchased at $50/share on 07/02/2001.

100 shares of XYZ are purchased at $30/share on 08/01/2001.

The 200 shares of XYZ purchased on 06/01/2001 and 07/01/2001 are sold at $40/share on 08/08/2001.

You can linearly decrease all you want, but you have a wash sale of 100 shares and add the $10 per share loss to the basis of your 8/1 shares.

The above makes sense for the n < $40/share case, but my question for the n = $40/share case still exists. For the n = $40/share case, you are apparently assuming that the wash sale was of the shares purchased on 07/02/2001. But why wouldn't the wash sale be considered to be of the shares purchased on 06/01/2001 (at $40/share and sold also at $40/share) instead? In other words, is there a good reason why a zero difference between redemption and purchase price cannot be considered a loss? There's no better or worse reason why to consider such a zero difference a gain, for which the wash sale rule wouldn't apply. By considering the wash sale to be on the 06/01/2001 shares instead of on the 07/02/2001 shares, then the $10/share tax loss on the 07/02/2001 shares could fully be recognized (i.e., not disallowed).

Note that if n were just $0.01/share higher at $40.01/share, then there's no question at all that there would be a net $10/share loss recognized (strictly from the 100 shares purchased on 07/02/2001). For n = $40.02/share, $40.03/share, and so on, there is still a net $10/share loss recognized. (Notice the pattern here.) On the contrary, if n were just $0.01/share lower at $39.99/share, then there's no question at all that that there would be a net $0.01/share gain recognized (strictly from the 100 shares purchased on 06/01/2001). For n = $39.98/share, $39.97/share, and so on, there would be a net recognized gain of $0.02/share, $0.03/share, and so on, respectively. (Again, notice the pattern here.) Note that these two patterns are significantly different from one another. So the question is whether n = $40/share must follow the first of the two patterns (i.e., net $10/share loss recognized) or must follow the second of the two patterns (i.e., net $0/share gain/loss recognized), or could the benefit of the doubt be used to the benefit of the taxpayer (by choosing to use the first pattern)?

If you chose to specifically identify the 7/2 and 8/1 shares as those being sold, you'd have a zero gain/loss and still hold the 6/1 shares at $40 per share.

No matter how you slice it, unless you want to identify the 6/1 and 8/1 shares, thus realizing a $1,000 taxable gain and a holding of 100 shares at $50, you have no bottom line loss and retain 100 shares at $40.

See page 52 of Publication 550.

Phil Marti
VITA Volunteer
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