April 1, 2021 at 6:50 am #19343
I’m doing taxes for someone new to trading options in 2020 and he didn’t know about wash sales… I’m new to this too, but I think I mainly understand it except for a few things that don’t seem to be in the examples.
I have a couple situations where there are transactions in the 30 days leading up to a loss, then continuous transactions – some with gains and some with losses going into next year.
1 – I feel I should only adjust the cost basis of transactions after the loss, that the period in the 30 days before is only for classifying. Is that right or does their classification as “replacements” mean that I’m supposed to adjust them too?
2 – One ticker has a large loss on one particular day but it’s two transactions. I kept them both as unadjusted wash sales, then went through and assigned proportional losses in the blocks after – breaking up the 1st transaction to apply to the size of the next ones, then moving to the 2nd. After all of that day was assigned, all of the next transactions were or had become wash sales, so I started again with the ones adjusted the 1st one and to the end and start again and so on. Is that right or do I have to fully concentrate on the 1st one until it’s gone, then move to the 2nd? I did it this way because they were both on the same day.
3 – A few days before the big options loss, he bought stock in his IRA – does that mean the equivalent amount of calls can’t be realized? (probably answered by #1, but just to be sure.
If you could help with any of this, or point me to a good resource, I would appreciate it. I only have a handful of complicated tickers but I can’t find the answers.
ChristineApril 5, 2021 at 9:12 pm #20381walter1Participant
I’m certainly no tax professional, but here are my opinions.
#1 — Adjust them too.
A “second” transaction relative to the same symbol ocurring up to 30 days before a loosing transaction can trigger the wash on the looser. Then the looser’s wash can be added to that prior “second” transaction’s cost basis. I guess that if you don’t add the wash to the cost basis, you would forfeit it which would seem to go in irs favor.
#3 — It looks like IRA purchase can create a wash.
According to Pub 550:
You cannot deduct losses from sales or trades of stock or securities in a wash sale unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities.
A wash sale occurs when you sell or trade stock or securities at a loss and within 30 days before or after the sale you:
Buy substantially identical stock or securities,
Acquire substantially identical stock or securities in a fully taxable trade,
Acquire a contract or option to buy substantially identical stock or securities, or
Acquire substantially identical stock for your individual retirement arrangement (IRA) or Roth IRA.
If you sell stock and your spouse or a corporation you control buys substantially identical stock, you also have a wash sale.
The Fairmark article, under Taxation of Investments, Capital Gains, Wash Sales and IRAs, agrees.
Pub 550 also says
More or less stock bought than sold.
If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.
So according to that, it seems that not all of the shares of a loss become wash shares but only some of them that match with another purchase. I’m going to stop and think about that for a long time. Could that mean that a lot of transactions do not have to become washes because there are no remaining shares that have not already been paired with a buy?
When the number of shares is different between transactions it becomes very complex. I might try to keep track of everything that takes place. You might think that to add to cost basis, you would do the addition, and then put the result in place of the original cost basis.
But that makes it easy to get lost and the confusion gets multiplied as it moves forward with cost basis getting continually modified again and again. It’s also not how irs wants adjustments to cost basis to be reported.
In the 8949 instructions, near the end, there is a table of the codes under “Adjustments to Gain or (Loss)”, code B:
If this transaction is reported on a Part I with box B checked at the top or if this transaction is reported on a Part II with box E checked at the top, enter the correct basis in column (e), and enter -0- in column (g).
If this transaction is reported on a Part I with box A checked at the top or if this transaction is reported on a Part II with box D checked at the top, enter the basis shown on Form 1099-B (or substitute statement) in column (e), even though that basis is incorrect. Correct the error by entering an adjustment in column (g). To figure the adjustment needed, see the Worksheet for Basis Adjustments in Column (g), later. Also, see Example 4—Adjustment for incorrect basis in the instructions for column (h), later.
The basis adjustment from a wash would be the negative of the wash, or proportion thereof, and a “B” goes in column (f). Then if that too becomes a wash, codes “BW” would go in column (f) and the net of the adjustments in column (g). On a spreadsheed, I would like to add columns to keep track of both the B and the W amounts as well as how many shares and dollars left in the wash, etc.April 6, 2021 at 3:33 pm #20421
Hi Walter – Thank you for replying!
Yes, I think maybe I should adjust those earlier “replacements” but I was hesitant because it doesn’t seem like the IRS would want me to cancel out gains that were purchased and sold before the options producing this loss were purchased… but I do read the wash sale section that way too.
For #2, I think the B refers to the checkboxes at the top (A – Basis reported to IRS, B – basis not reported to IRS, C- basis on on 1099
All of his are A – I have the basis and it’s right. I was going to only report the adjusted amount based on the adjusted wash sales that are in his 1099 from the brokerage, but I’ll double check to see if I need to add codes or do it differently
I think I do separate the quantities and assign the losses and adjust the other bases until its eventually gone… I just wasn’t sure if the 2 different transactions on the same day are both “first” but I think I’m talking myself into the idea that they aren’t and I just fold some of the losses from that first one into the second one to adjust it too…
Anyway, thank you again for replying. The interaction is helpful to me!May 14, 2021 at 1:28 am #35270
Hello again – I found out about the tax extension but now I’m back and I’m lost again. 🙁
I think the actual calculations are right but I have myself all confused about form 8949
Because the broker had box A checked – I do need to report the basis they have in the 1099 in column E and adjust column G for the cost. (I was putting adjusted cost in column e – so much easier)
In the instructions for 8949, I see that if actual basis is more than 1099 basis, I’m supposed to report it as a negative number in column g
I am supposed to report wash sales as positive numbers
Any combination codes are netted
So for example:
col D proceeds = 1204.81
col E costs reported in 1099 = 2065.14
Actual cost after adding in a previous wash sale = 6085.47
So the 4020.33 I added to this cost would be negative with a code of B in columns F and G
But – before adjustment, this was also a loss of 860.33 and it’s also a wash sale
W should added to G as a positive number
So my overall loss is 4880.66 (new wash sale)
But if I follow the instructions and I add the negative cost adj to the positive Wash adj, I get -3160.00 for column G
And now none of these BW adjustments add up when I go across because they’re wash and I need to have 0 in column H
I feel like it should be the total wash sale 4880.66, but that’s not how I read it
I have myself all confused again – do you think the net amount -3160 is right? or some flaw in what I”m doing?
Thanks for your help!May 14, 2021 at 6:27 am #35356
I think figured out my problem
I take the original gain or loss (D-E)
Add the (negative) Basis adjustment to that original gain/loss making a bigger loss or offsetting the gain
THEN I have that new total amount as the adjustment that goes in column G reflecting the whole Wash Sale I can’t take.
I’m sorry for the extra post/confusion. Too many numbers today
If I’m wrong, please let me know
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