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I was just looking at my 1099 from Interactive Brokers, and noticed that they say I had a $120 loss disallowed due to it being a wash sale.

Here's what happened:
1300 shares long-term position
100 shares purchased 7/8/13
1400 shares sold 7/25/13 (entire position liquidated, never repurchased)

Why should the loss on 100 of the 1300 long-term shares be disallowed? Why is the wash sale rule applicable here?

I thought I knew this stuff, but it's hard to believe that a broker the size of IB could get this wrong.

Ken
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I just checked my 1099 from IB, and have a similar reporting error with two of my holdings. One is an
obvious broker error that I can correct with my tax filing software, TaxAct. The other I have to check-
I own shares of the second holding in my Roth ac, so I have to verify transactions in that account did not
trigger the disallowed loss.

Do you own a position of the same holding in a retirement account at IB?
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I have found that IB 1099s are notorious for containing errors.

Ira
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Do you own a position of the same holding in a retirement account at IB?

I hadn't thought of that, so a great suggestion -- but, no (after checking), I never held that security in any other account, whether at IB or elsewhere.

But thanks for the idea. And thanks for the report that you see similar errors on your IB 1099. I'm just astonished that a broker the size of IB would have such reporting glitches.

Ken
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I have found that IB 1099s are notorious for containing errors.

That's very disappointing to learn. I hope I've paid attention in past years and compared them against my own records, but I'll definitely pay closer attention this year. Thanks, Ira.

Ken
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I thought I knew this stuff, but it's hard to believe that a broker the size of IB could get this wrong.

Ken

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Oh Ye of little faith! IB is actually pretty small compared to the likes of Merrill Lynch and Fidelity, and they manage to get stuff wrong - or at least reported in such a way that doesn't reflect the actual transaction - all too often.

I once had Fidelity report $15,000 of proceeds on a bond, of which I never, ever, owned more than $5,000 par value. I sort of knew why, on that one. I had sold pursuant to a tender offer that was rejected initially, due to insufficient response by the total number of bondholders, and then later went through. They had cancelled and re-entered the trade in my account twice, and there was no reason for either. There was only one actual sale, and one receipt of $5,000.

So I reported 3 sales, one with the actual gain. And then two more $5K sales, with no gain or loss, to avoid a later round of correspondence with IRS.

Bill
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The wash sale rule applies to trades 30 days before or after the sale that triggered the loss. The loss on the 7/8/13 purchase would have been disallowed. Is the disallowed loss equal to the loss on those 100 shares? If so the end result is correct no matter how the 1099 is worded.


http://www.investopedia.com/terms/w/washsalerule.asp

Definition of 'Wash-Sale Rule'


An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security in a wash sale. The rule defines a wash sale as one that occurs when an individual sells or trades a security at a loss, and within 30 days before or after this sale, buys a “substantially identical” stock or security, or acquires a contract or option to do so. A wash sale also results if an individual sells a security, and the spouse or a company controlled by the individual buys a substantially equivalent security.
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The wash sale rule applies to trades 30 days before or after the sale that triggered the loss. The loss on the 7/8/13 purchase would have been disallowed. Is the disallowed loss equal to the loss on those 100 shares?

No, they clearly disallowed the loss of 100 of the 1300 long-term shares, not the 100 shares purchased on 7/8/13 (which actually had a small gain).

But my understanding of the wash sales rule was that if the entire position is closed, there can be no wash sale involved (assuming no future purchase within 30 days, of course). Is that not accurate?

Ken
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The wash sale rule applies to trades 30 days before or after the sale that triggered the loss. The loss on the 7/8/13 purchase would have been disallowed. Is the disallowed loss equal to the loss on those 100 shares?

No, they clearly disallowed the loss of 100 of the 1300 long-term shares, not the 100 shares purchased on 7/8/13 (which actually had a small gain).

But my understanding of the wash sales rule was that if the entire position is closed, there can be no wash sale involved (assuming no future purchase within 30 days, of course). Is that not accurate?

Ken

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Your understanding is correct. But it may be that their computer, because it's looking at the block of 1400 sold as two sales, one short-term for 100 shares, and one long-term for 1300 shares, in focusing on the long-term 1300 shares, looked forward and backward 30 days and found an offsetting purchase, and so went into "wash sale" mode.

Even if they were right, you'd load the disallowed loss into the basis of the remaining 100 shares, which are short-term. Did they do that? If so, you're actually better off reducing a short-term gain.

Bill
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Your understanding is correct. But it may be that their computer, because it's looking at the block of 1400 sold as two sales, one short-term for 100 shares, and one long-term for 1300 shares, in focusing on the long-term 1300 shares, looked forward and backward 30 days and found an offsetting purchase, and so went into "wash sale" mode.

I suspect you are right, this is how the computer arrived at it.

Even if they were right, you'd load the disallowed loss into the basis of the remaining 100 shares, which are short-term. Did they do that? If so, you're actually better off reducing a short-term gain.

Well, a couple of things. First of all, I was wrong to characterize the 1300 shares as a long-term holding -- it was actually a month short of long-term. So the entire transaction is characterized as short-term.

Oddly, they split the sale into two chunks of 1000 and 400 shares (perhaps that's the way the trade was filled; I haven't looked). But I hadn't noticed -- you are exactly correct: The total basis reported for the two transactions is $120 more than real, so clearly they added the "disallowed" amount to the basis. Thus, even though the reporting isn't 100% accurate, there is no tax consequence in reporting it the strange way that they have.

Sorry for wasting people's time with what has turned out to be completely inconsequential, but I did learn some things.

Thanks, Bill.

Ken
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Sorry for wasting people's time with what has turned out to be completely inconsequential, but I did learn some things.

Don't discount the importance of understanding, and it has been educational for me.
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