A wash sale occurs when you sell shares for a loss and then buy back shares of the same security or one that is “substantially identical” (see IRS Publication 550 (“Investment Income and Expenses”) for more details) within 30 days. This 30-day period applies to purchases before and after the date of the sale. If you have a wash sale, then you cannot take that loss against other gains or income to lower your taxes. Instead, here is what happens if you have a wash sale:
- You cannot deduct the loss
- The amount of the loss gets added to the cost basis amount of the share purchase that caused the wash sale
- The purchase date of the new shares will be adjusted. The number of days from the sale date to the purchase date of the shares that caused the wash sale will be added to the original date that you purchased the shares you sold. This is known as the “tacking method”.
On January 12, 2015, you purchased 100 shares of XYZ Fund at $10 per share, or $1,000. The shares have dropped in price to $9 per share so you sell the shares on November 10, 2015 and have a loss of $100 ($900 minus $1,000). Fifteen days later the price has dropped to $8 per share and you believe that is a great price so you decide to buy 100 shares of XYZ again at $8 per share, or $800. Because you purchased those shares within 30 days of the sale (with a loss), you have a wash sale. This is what happens:
- You cannot deduct the loss at this time
- The “loss” of $100 gets added to the $800 cost of the shares you just purchased making the adjusted cost of those newer shares $900.
- The new shares purchased on November 25, 2015 caused a wash sale, so the purchase date will be adjusted. This was 15 days from the date of the sale (November 10) which initially had a loss so the 15 days will be added to the purchase date of the original shares that were sold. The adjusted purchase date of the new shares will be: January 12, 2015 plus 15 days = January 27, 2015.