Tax planning and compliance for investors
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By Kaye A. Thomas
Updated June 1, 2007
How the wash sale rule applies to same day sales.
The IRS has created confusion with a statement about how the wash sale rule applies to same-day transactions. The statement in Publication 550 is overly broad.
IRS Publication 550 contains the following statement:
Loss from a wash sale of one block of stock or securities cannot be used to reduce any gains on identical blocks sold the same day.
Here's an example of a common situation where this statement does not apply:
A day trader buys 100 XYZ and sells it the same day at a loss. Later that day, he again buys 100 XYZ and sells it at a gain.
It's clear that the wash sale rule applies to the first sale, because it's a loss with replacement stock bought within 30 days. The disallowed loss is added to the basis of the second block of stock and reduces the gain (or turns the gain into a loss). The IRS will not prevent you from offsetting the gain with the loss in this situation, even though both sales took place on the same day.
The situation the IRS is concerned with is different. There's an example of that situation in Publication 550, right after the statement quoted above:
Example: During 1997, you bought 100 shares of X stock on each of three occasions. You paid $158 a share for the first block of 100 shares, $100 a share for the second block, and $95 a share for the third block. On December 23, 2002, you sold 300 shares of X stock for $125 a share. On January 6, 2003, you bought 250 shares of identical X stock. You cannot deduct the loss of $33 a share on the first block because within 30 days after the date of sale you bought 250 identical shares of X stock. In addition, you cannot reduce the gain realized on the sale of the second and third blocks of stock by this loss.
OK, maybe not the most artful example. But if you work through it, you'll see that what they're getting at is simply this: you have to treat separate blocks of stock separately, even if you sell them all on the same day.
In the example, the taxpayer made a single sale of multiple blocks of identical stock. The taxpayer would like to claim a deduction for the one block that produced a loss, even though he bought identical stock within the wash sale period. So the taxpayer is tempted to argue that instead of selling 100 shares at a loss and 200 shares at a gain, he sold 300 shares (one big block) for a gain. The IRS says it won't buy this approach. The fact that you sold all three blocks together doesn't turn them into one big block. You still have a block of 100 shares that produced a loss, and you can't deduct that loss because you bought replacement shares within the wash sale period.
We get questions about this rule from time to time, because the first statement quoted above is far too broad. If you trade in and out of the same stock multiple times within a single day it may appear that you're unfairly treated under the wash sale rule. But that's just a mistake in the way the IRS phrased its explanation. The only thing you need to know here is that each block of stock must be treated separately in applying the wash sale rule, even if you sell multiple blocks at the same time.
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