Taxes 2016

Yay taxes are done, not going to submit yet but always a relief each year to be done with them.

If you ever want your eyes to bleed read up on wash sales rules.

Cad said:

Not trying to be "that guy" but whats the big deal? They don't want you locking in losses for that year that you deduct and then the issue gains back the losses the next year and you make money on the stock. So if you sell and rebuy the same issue the cost basis just changes so you can't incrementally sell/rebuy a stock during short downturns and get the gains and deduct the "losses" both.

Whats complex about that?

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Well Khane it's not always that clear. You can't buy the same investment 30 days BEFORE and after the loss without the rule coming into play, and for people who day trade we are talking thousands of transactions. The rule was never put into place thinking about how it affects day trading, it was to stop investors dumping losers for the write off at YE then instantly buying it back. The poop of it is in the record keeping. I understand the rule perfectly but have you seen how wash sales are listed on a 1099? The vast majority of people maybe even yourself don't really understand it. The wash disallowed but the cost basis is added to the other transaction so you don't really loose it, but it continues to roll to each new transaction in that security for the whole year unless you don't trade that security for 30 days.

So last year in just SPY alone I have $50,000+ in disallowed loss but because I don't trade in December the loss is added to final transaction, but if a person didn't understand the rule and traded even one time in that security at YE the IRS would be saying please pay tax on all gains and the loss moves to the next tax year. THis can result in massive tax bills to the the unaware.

Did you know:
This includes trading "substantially similar" asset;
This includes trading options
This includes trading in a separate account or spousal account. In fact if you trade say S&P 500 for a year and racking up numerous wash sales, then your wife buys the market in her IRA in December you have no forever given up the loss sales.


You buy stock A at $90 then it drops and you buy some more at $80, it recovers to $85 and decide to sell, do you have a taxable gain?

Cad said:

You using average cost basis or fifo?

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I do FIFO, avg cost under 1000s of trades further complicated by mutliple entries and exits in my experience is not really viable. Wash sales also prevent aggregate reporting to the IRS my 1099 is an encyclopedia in length.

Cad said:

So then your question isn't hard at all, how much did you buy at 90 and how much at 80 and how much did you sell at 85?

How is this a hard problem other than it's a lot to keep track of if you are buying selling daily?

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100 shares at 90 100 at 80 sold 200 at 85

Cad said:

Seems to me that since you sold after both buys and didn't buy again under either FIFO or avg. cost you have no net gain and wash sale rule doesn't apply since you didn't buy again within 30 days after any sale.

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wash sale rule applies to purchases 30 days BEFORE and after any sale, the IRS looks at the above transaction as two trades one in which you lost $5/share and another purchase within the 30 day window with a $5/share gain. The loss is disallowed and the gain is recognized. However, if you don't trade it for the following 30 days the IRS will allow you to add the cost basis of the first trade to the second, and your gain/loss then nets out to what you expect.

and to clarify further assume you do this twice within any 30 day period. 99% of people would think they would be at no net gain. There is nothing intuitive about the wash sale rule.

Not trying to entrap you but even giving the most basic of examples and you incorrectly believe it "doesn't apply" when it does, but in this very narrow example it simply nets out to the same result. (and btw your 1099 would show the loss disallowed with out any further note on it's handling) Would not be difficult for me to give you a much more complex series of transaction for it to be rather cumbersome to come to the correct answer, which was my original point.

I have on several occasions had experienced CPAs who are not stupid call me and ask me to explain more complex wash sale rules, and I have no doubt I could probably make a living on just this issue with active traders.

Cad said:

Sure but you sold it all so there's no holdings to apply the loss to the cost basis for next year. I read the rule as not applying in that case since the intent of the rule is to prevent someone from locking in losses and repurchasing the security. That's not what you did here so it wouldn't apply.

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I edited to explain further, but it very much does apply. A wash sale applying and what gain/loss you end up are not the same thing. It is indeed a wash sale.

Please let me know if you are just wanting to argue or if interested in this issue, I don't care about winning internet arguments but don't mind taking time to explain it if you are legitimately curious. I mean you no offense and know you aren't a dummy but you are having the same reaction most people have when they simply look up the rule and read it and assume it's more logical than it actually it is. By the end of examples you'll go "Ok I get it, pretty fucked up" right where we started.

Well that would be your loss and my shame as I am most certainly correct but may fail in communication.

Do you accept that the above example is a wash sale or do you still think it doesn't apply? Can you show me the part of the rule that led you to your conclusion. Have to be careful I don't post my account number like a dummy but I can post some actual examples.

Cad said:

I read the rule as not applying in that case since the intent of the rule is to prevent someone from locking in losses and repurchasing the security. That's not what you did here so it wouldn't apply.

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and btw this statement is about the most perfect summation of why this rule is a mess, wash sale rule is a chock full of unintended consequences for which the rule was never meant to apply but DOES.

This is wall streets fault however, the rule originally was only 30 days following so what did the sneaks start doing? They started for a short period doubling their position. Have 100 shares currently unrealized loss, go ahead and buy 100 more, then sell 100 and take your loss, waltz into the new year holding the same position. IRS does a knee jerk reaction saying ok 30 days before counts as well fuckers without fully thinking thru what that would impact. All of sudden many many transactions become wash sales that have fuck all to do with avoiding taxes

Sorry for the spam posts, here is a very basic transaction from last year, on 3/28 two trades both at a gain. On 3/30 another trade at a loss. Now at that point I have no holding and this transaction is a wash sale. I have taxable gain from the first two trades and disallowed loss on the third. You would read the rule the same as any reasonable person would and say well it doesn't apply you no longer hold it, but because I had previously bought this security the loss is disallowed, which takes me back to my statement that started this back and forth "that's fucked up and more complicated than it would appear at first glance"

Cad said:

No wash sale when you sell all shares? - Bogleheads.org

These guys are reading the rule the same way I do. Since you have no replacement shares, there's nothing to apply the disallowed loss cost basis to.

In your example did you sell all your shares? If you still held shares then the sale is obviously a wash sale. If you didn't then it should not be.

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There is barely a place on the internet that understands wash sales and no I'm not kidding. Most people google it get tons of wrong information and some get hurt in the process. no where in the rule does it say "you must have replacement shares for it apply". The wording is shit poor, the rule is not intuitive and these issues compound to peoples misunderstanding just as you are seeing. We get to make it triple fucked up in that 1099s are not designed in manner to make this clear nor is your Schedule D.

We get to add super saiyan level of confusing by "wash Sale rules" and what gain/loss you ultimately end up at are two separate issues, but we often want to equate them as being the same thing, because sometimes they are...and sometimes they aren't.

As I posted earlier I have about $45,000 in disallowed loss from wash sales BUT at the end of the day I have a net capital gain and I was able to USE my wash sale losses, but that's because I understand the rule and I know how to report it. It can be easily messed up by individuals and accountants resulting in incorrect tax reporting.