Hello, Tax Strategy Fools. I have a wash sale question.In April of '99, I bought 82 shares of Worldcom at $58 apiece, for a cost basis of roughly $4750. This year, WCOM has gone into the dumper w/most of telecom, so I figured I could chop my tax bill by selling this year and then buying back after the 30-day period required by the wash sale rules.Since WCOM was recently trading at $16, I stood to realize a loss of 82*(58-16), or roughly $3400.But, then... I did a very dumb thing.Instead of hitting "SELL" on my online trading page, I hit "BUY", which instead of closing out my position, doubled it. (Bought another 82 shares, at roughly $16).After realizing my mistake and kicking myself repeatedly, I sold the whole position (164 shares at about $16).Now I'm wondering where I stand w/regard to those accursed wash sale rules. Since I bought shares within 30 days of selling, will my juicy $3400 loss this year be disallowed?I've breezed through IRS Publication 550, and my current theory is that the wash sale rules will indeed disallow the $3400 loss on the 82 shares purchased in April of '99. That $3400 will instead go to an increase in my basis on the 82 shares I mistakenly bought recently in Dec. 2000. And, since I sold those "Dec. 2000" 82 shares as part of the total 164-share sale, I will be able to claim the $3400 loss as part of the sale of my "Dec. 2000" 82 share block of WCOM.Another thing I remember which supports this is that I recall from TMF Taxes' wash sale column a statement that if you close out your position prior to the end of the tax year (which I've done) and then stay out for 30 days after the sale(which I definitely plan to do), that you're OK, tax-wise. (Apologies if this is mis-remembered)So, bottom line, I still think I can deduct my $3400 loss in spite of my own stupidity.Have I missed anything?Thanks much,Doug
You have it right. You are now out of WCOM. If you STAY out for 31 days, you can claim the whole loss on your 2000 taxes. Technically the first sale is a wash sale because of your inadvertent buy when you intended to sell. If you therefore follow the wash sale rule, the loss is carried forward to add to your cost basis of the next buy. Somebody can correct me if wrong, but this may make your long term loss into a short term loss, meaning it would first be netted against short term gains, if that makes any difference. Usually tax rules are set up to confound any attempt to get out of paying taxes, but it would seem that potentially this could leave you with left-over long, rather than short term gains and therefore save you some taxes. You'd rather have long term gains, so you'd prefer short term losses. I suspect there's some technicality somewhere to keep you from doing that; if so somebody will chime in. Best wishes, Chris
Have I missed anything?Just your note to Santa asking for a sampler that says "Don't run the computer with your elbows!"You've got the tax law down fine.TMF ExROPhil Marti
>>>Somebody can correct me if wrong, but this may make your long term loss into a short term loss, meaning it would first be netted against short term gains, if that makes any difference. <<<I need to check, but I thought that one of the side issues of the wash sale rule was that it adjusted the holding period as well as the cost basis. This would turn a possible short term holding period for the still held shares into a long term holding period based on the first purchase.Ira
Chris wrote:Somebody can correct me if wrong, but this may make your long term loss into a short term loss, meaning it would first be netted against short term gains, if that makes any difference. but Ira wrote:I need to check, but I thought that one of the side issues of the wash sale rule was that it adjusted the holding period as well as the cost basis. This would turn a possible short term holding period for the still held shares into a long term holding period based on the first purchase.Based on some more excavation of IRS Publ. 550, I think Chris is right. On p. 52, I found the following paragraph (bold emphasis mine):"If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities. 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 begins on the same day as the holding period of the stock or securities sold."So, in my case, my holding period for the Dec. 2000 shares of WCOM (the ones on which my $3400 loss will actually be taken) begins on the day I sold the 82 "Apr. 1999" shares, 12/20/00. And since I sold the 82 "Dec. 2000" shares on the same day as part of the same transaction, my holding period would end that day as well.Man, the Fool was right. Day trading will kill you. :)So, my trading misadventure has essentially turned a long-term loss into a short-term loss. And since I do have a decent amount of short-term gains (not $3400 worth, but some), I've actually made some money by doing this. Without the wash sale rules, my loss would've all gone against long-term gains. Whoda thunk it?It is a little hard to believe that the IRS would let something like this slide. With all of the wash sale rules, constructive sale rules, etc., you'd think they would've established something to do exactly like what Ira warns about (i.e., adjust the holding period so the loss stays in the long-term category).But the p. 52 language looks clear enough to me, so I'm going to shut my mouth and take my money.TMF ExRO wrote:Have I missed anything?Just your note to Santa asking for a sampler that says "Don't run the computer with your elbows!"Hey, it takes a lot of brainpower to be this dumb! :)Thanks everyone,Doug
Doug,You misinterpreted the statement which you bolded. "The holding period for the new stock or securities begins on the same day as the holding period of the stock or securities sold." This does not say the "day the stock or securities were sold". "The holding period of the stock or securites sold" begins on the day the stocks or securities were originally purchased. This is exactly what I thought... it has the potential of turning a short term capital transaction into a long-term one.Ira
Ira's explanation in the response preceding this one is correct. When the wash sale rule applies, the holding period for the replacement stock is the same as that for the stock sold in the wash sale. IOW, it goes back to the purchase date of the stock that was sold.TMF ExROPhil Marti
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