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I was wondering if there would be any information on whether the sale of shares with zero gain/loss could legitimately qualify as a wash sale. Put another way, when sale price equals cost basis for a sale of shares, it could be considered a loss just as correctly (or just as incorrectly) as it could be considered a gain, so the question is whether the taxpaying investor could use the benefit of the doubt to his/her own advantage. Here is an example:

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.

The question would be (1) whether the 100 shares purchased on 08/01/2001 could be considered to have “washed away” the 100 shares purchased on 06/01/2001, hence allowing the \$10/share capital loss on the 100 shares purchased on 07/02/2001 to be realized (for a total loss of \$1,000), or (2) whether the 100 shares purchased on 08/01/2001 would need to be considered to have washed away the 100 shares purchased on 07/02/2001, hence disallowing the capital loss on those shares (and realizing a zero gain/loss on the 100 shares purchased on 06/01/2001).

In graphical terms, suppose that any realized gain/loss on the 08/08/2001 sale above were considered as a function of n above. There is obviously a discontinuity in such a graph at n = \$40/share: as n linearly decreases from \$40/share, then there is a net realized gain (all from the 06/01/2001 shares) which linearly increases from \$0, but as n linearly increases from \$40/share, then there is a fixed net \$1,000 realized capital loss (all from the 07/02/2001 shares, assuming that the 06/01/2001 shares are to be considered the “washed away” shares for this case). So the question is whether such a graph at n = \$40/share should be made to behave more like n < \$40/share (to the IRS's benefit) or should be made to behave more like n > \$40/share (to the taxpayer's benefit).
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When you sell stock, you have the option of using either the FIFO (first in, first out) method or the specific allocation rule. If you opt for the specific allocation rule, you could conceivably not show a loss and therefore not have a wash sale.
No. of Recommendations: 1
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.

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
No. of Recommendations: 0
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
No. of Recommendations: 1
In other words, is there a good reason why a zero difference between redemption and purchase price cannot be considered a loss?

See the Pub 550 discussion, paying special attention to the discussion of gains and losses on the same day.

Phil Marti
No. of Recommendations: 0
In other words, is there a good reason why a zero difference between redemption and purchase price cannot be considered a loss?

See the Pub 550 discussion, paying special attention to the discussion of gains and losses on the same day.

Phil Marti

I looked at the “loss and gain on same day” section with the example on page 52 of http://ftp.fedworld.gov/pub/irs-pdf/p550.pdf, but I don't see how it is relevant at all to my question. It still doesn't clarify whether zero should be considered a loss or whether zero should be considered a gain.

Let me try to present the example scenario slightly differently, noting how I have split the share redemption step into two separate steps:

(1) 100 shares purchased on 06/01/2001 at \$40/share

(2) 100 shares purchased on 07/02/2001 at \$50/share

(3) 100 shares purchased on 08/01/2001 at \$30/share

(4) 100 shares from 06/01/2001 redeemed on 08/08/2001 at \$40/share

(5) 100 shares from 07/02/2001 redeemed on 08/09/2001 at \$40/share

Would/could step #4 be considered a wash sale or not?

If so, then the shares purchased in step #3 would have its effective purchase date changed from 08/01/2001 to 06/01/2001, and their cost basis of \$30/share would be adjusted by \$0/share to \$30/share. Hence, the only shares still held are 100 shares purchased on 06/01/2001 and 100 shares purchased on 07/02/2001. Then, step #5 would not be a wash sale, where a loss of \$10/share would be recognized.

If not, then the only shares still held after step #4 are 100 shares purchased on 07/02/2001 and 100 shares purchased on 08/01/2001. Next, step #5 would result in a wash sale, where there would be a disallowed \$10/share loss on the shares purchased on 07/02/2001. The replacement shares bought on 08/01/2001 would have their effective purchase date changed to 07/02/2001, and their original cost basis of \$30/share would be increased by \$10/share to \$40/share.

Now if steps #4 and #5, respectively, became

(4) 100 shares from 06/01/2001 redeemed on 08/08/2001 morning at \$40/share

(5) 100 shares from 07/02/2001 redeemed on 08/08/2001 afternoon at \$40/share

then I don't see any reason for a difference in the tax results. This situation is also basically the same as the example in my very first post in this thread, besides for the established ordering of when the share lots (between the lot purchased on 06/01/2001 and the lot purchased on 07/02/2001) were sold.
No. of Recommendations: 1
(1) 100 shares purchased on 06/01/2001 at \$40/share

(2) 100 shares purchased on 07/02/2001 at \$50/share

(3) 100 shares purchased on 08/01/2001 at \$30/share

(4) 100 shares from 06/01/2001 redeemed on 08/08/2001 at \$40/share

(5) 100 shares from 07/02/2001 redeemed on 08/09/2001 at \$40/share

Would/could step #4 be considered a wash sale or not?

No. Without a loss, there can't be a wash sale.

<snip>

If not, then the only shares still held after step #4 are 100 shares purchased on 07/02/2001 and 100 shares purchased on 08/01/2001. Next, step #5 would result in a wash sale, where there would be a disallowed \$10/share loss on the shares purchased on 07/02/2001. The replacement shares bought on 08/01/2001 would have their effective purchase date changed to 07/02/2001, and their original cost basis of \$30/share would be increased by \$10/share to \$40/share.

Right.

Now if steps #4 and #5, respectively, became

(4) 100 shares from 06/01/2001 redeemed on 08/08/2001 morning at \$40/share

(5) 100 shares from 07/02/2001 redeemed on 08/08/2001 afternoon at \$40/share

then I don't see any reason for a difference in the tax results.

There isn't a difference. You have 100 shares with a basis of \$40 and no bottom line recognized loss.

Maybe someone else can find a better way of explaining this to you.

Phil Marti
No. of Recommendations: 0
No. Without a loss, there can't be a wash sale.

My question was regarding the semantics of the terms “gain” and “loss” according to the IRS, but I just happened to find some answers on page 42 of IRS Publication 550:

Gain. If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.

Loss. If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.”

Hence, “zero” would neither be a loss nor a gain, so I would suppose that wash sales, applying only to losses, could not apply to “zero”. However, if the definitions were the following:

Gain. If the amount you realize from a sale or trade is not less than the adjusted basis of the property you transfer, the difference is a gain.

Loss. If the adjusted basis of the property you transfer is not less than the amount you realize, the difference is a loss.”

then “zero” could be both a gain and a loss, meaning that the wash sale rule applying only to losses would include “zero”.

Still, I find that an objective choice between these two pairs of definitions would be somewhat arbitrary, which is why my question had arisen initially.
No. of Recommendations: 2
“Gain. If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain.

“Loss. If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss.”

Hence, “zero” would neither be a loss nor a gain, so I would suppose that wash sales, applying only to losses, could not apply to “zero”. However, if the definitions were the following:

“Gain. If the amount you realize from a sale or trade is not less than the adjusted basis of the property you transfer, the difference is a gain.

“Loss. If the adjusted basis of the property you transfer is not less than the amount you realize, the difference is a loss.”

then “zero” could be both a gain and a loss, meaning that the wash sale rule applying only to losses would include “zero”.

Still, I find that an objective choice between these two pairs of definitions would be somewhat arbitrary, which is why my question had arisen initially.

If wishes were horses.... I'm not a lawyer, but I believe there's an underlying principal that words mean what they mean, unless specifically defined to mean something else. Since, in the ordinary use of the words, if there's a gain you made money and if there's a loss you lost money, I don't see anything arbitrary about the definitions.

Phil Marti
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Maybe I can explain it this way. If you prepare your tax return, and you owe money, you mail your tax return to one of IRS's lock boxes.

If you have a refund or owe no taxes, you mail it to the address where refunds are processed.

Using the above as a guideline, IRS considers a \$0 gain/loss the same category as a gain as there are only wash sale rules for losses. And since a \$0 gain/loss clearly is not a loss, then it has no exception is falls into the same pot as a gain.

I hope this dead horse is now buried.

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Maybe I can explain it this way. If you prepare your tax return, and you owe money, you mail your tax return to one of IRS's lock boxes.

If you have a refund or owe no taxes, you mail it to the address where refunds are processed.

Okay; this is agreeable — based on the information on the back cover of the IRS Form 1040 instructions. One address is used when the taxpayer is writing the IRS a tax payment check, and another address is used when the taxpayer is not writing the IRS a tax payment check.

Using the above as a guideline, IRS considers a \$0 gain/loss the same category as a gain as there are only wash sale rules for losses. And since a \$0 gain/loss clearly is not a loss, then it has no exception is falls into the same pot as a gain.

It seems to me to be exactly the opposite. If a taxpayer were to have a net income loss during a tax year, then he/she would (generally) receive a refund; on the other hand, if a taxpayer were to have a net income gain during a tax year, then he/she would (generally) owe money to the IRS. So, since the mailing address is the same between the tax refund case (with a net income loss) and the zero tax case, it follows that zero is categorized with loss, not with gain, for this particular situation with tax return mailing addresses.

In other words, the tax-return-mailing-address owe vs. refund situation is not comparable to the capital gain vs. capital loss situation, where for the latter situation, I had eventually concluded from IRS Pub. 550 on page 42 that zero is considered to be in a category of its own — not a loss, but not a gain either. Hence, zero cannot be a wash sale since wash sales can never apply to a non-capital-loss sale.

I hope this dead horse is now buried.

The horse was apparently resuscitated for a moment, but finally I think that it can now rest in peace.