Order in which transactions are matched for wash sale rule

[MustacheAndaHalf]

One area of the IRS website explains that if you sold 100 shares at a loss, then bought shares 50 shares/day from Feb 7 to Feb 10, you would use the Feb 7 and Feb 8 purchases as part of the wash sale.

I made a small purchase of shares, but have a greater number of shares on which I'd like to realize a capital loss.  So based on my reading, I'm selling enough shares to exactly cause a wash sale - these are shares that have the smallest loss.

And then I'll wait a day, and tomorrow sell the shares I actually want to realize a loss (larger amount of loss).  It sounds like my first sale triggers the wash sale, and that clears the way for my later sales to realize a loss.

[terran]

Do any of the shares you've purchased in the last 30 days show a gain? If not, I would just all of them and be done with it. You'll need to have your brokerage account set to specific identification cost basis tracking unless you sell ALL shares regardless of when you bought them.

Also make sure you haven't bought and don't buy shares of the same investment within 30 days of today in either direction, in any account including IRAs. Dividends will likely be paid on your investment this month, so if you retain any of this investment in any accounts make sure dividend reinvestment is turned off.

[MustacheAndaHalf]

Do any of the shares you've purchased in the last 30 days show a gain? If not, I would just all of them and be done with it.

This is the second time I've seen you suggest something that is a wash sale under IRS rules.  If you don't understand the IRS definition, why are you trying to give advice about it?

Shares that don't have a gain would have a loss.  Recommending I sell shares at a loss, that I purchased within the past 30 days, is a wash sale.  I think someone else already tried to explain this to you in another thread:

"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,"
https://taxmap.irs.gov/taxmap/pubs/p550-026.htm#TXMP212cbd13

[Boofinator]

Do any of the shares you've purchased in the last 30 days show a gain? If not, I would just all of them and be done with it.

Shares that don't have a gain would have a loss.  Recommending I sell shares at a loss, that I purchased within the past 30 days, is a wash sale.  I think someone else already tried to explain this to you in another thread:

"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,"
https://taxmap.irs.gov/taxmap/pubs/p550-026.htm#TXMP212cbd13

I might have been the one doing the "correcting" in the other thread, but turns out terran is correct. After the transaction, you need "replacement shares" for there to be a wash sale (the IRS should be more clear in their instructions, but alas...). So as long as you don't buy "replacement shares" in the 30 days before or after, you don't experience a wash sale. If you sell all of the shares that were purchased in the last 30 days, there are no replacement shares that were "washed".

[terran]

Do any of the shares you've purchased in the last 30 days show a gain? If not, I would just all of them and be done with it.

This is the second time I've seen you suggest something that is a wash sale under IRS rules.  If you don't understand the IRS definition, why are you trying to give advice about it?

Shares that don't have a gain would have a loss.  Recommending I sell shares at a loss, that I purchased within the past 30 days, is a wash sale.  I think someone else already tried to explain this to you in another thread:

"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,"
https://taxmap.irs.gov/taxmap/pubs/p550-026.htm#TXMP212cbd13

As @Boofinator points out you're wrong.

Lets think about this logically. Even if you were right (which you're not) and you have a wash sale when you buy a stock and sell that same stock at a loss within 30 days then you're supposed to add the disallowed loss to the basis of the replacement stock (the thing that caused the wash sale), but if the stock that caused the wash sale is the same stock that you sold at a loss then you still have an allowable loss from selling the replacement shares, but having bought the things means you have a wash sale which means you should add the loss to the replacement stock.... and on and on we go in an infinite loop. This is why selling all of the stock that you bought within 30 days means no wash sale. There are no replacement shares, so there's no basis to which to add the loss.

[MustacheAndaHalf]

I quoted the IRS.  You haven't quoted anyone, let alone a source on a par with the IRS website.

[terran]

I quoted the IRS.  You haven't quoted anyone, let alone a source on a par with the IRS website.

Suit yourself. I and others have made repeated attempts to explain it to you and provided sources in the other thread. 

[MustacheAndaHalf]

I'm not asking for an explanation, I'm asking for sources.

Also I notice in the following thread, terran, you repeatedly use the IRS definition I quoted above, with no reference to replacement shares.  So now you agree with the definition from the IRS, and nothing to do with replacement shares?
https://forum.mrmoneymustache.com/investor-alley/tax-loss-harvesting-a-couple-questions-on-my-situation/

By the way Vanguard uses the definition I quoted: if you buy something and sell it at a loss within 30 days, Vanguard treats it as a wash sale.  And I then sold more, which was not counted as a wash sale, per my original situation in this thread.  So Vanguard seems to be using the IRS definition of the wash sale rules, including the order in which securities are sold.

[terran]

I've done the same at Fidelity with no issues.

Did you specifically identify the shares you sold at Vanguard, or do you have the default First In, First Out cost basis tracking method selected? That would indeed result in a wash sale if you've purchased within 30 days and then sold some, but not all of the investment as you would be selling the first shares you bought, not the shares you bought within 30 days.

Will you acknowledge that the result of a wash sale is that the disallowed loss is added to the basis of the replacement shares? If not, what do you think happens if you have a wash sale?

[MustacheAndaHalf]

Looking over all the examples in IRS publication 550, every one of them also mentions additional shares (IRS says "new shares", you're saying "replacement shares").  So here's the experiment that I think would prove your point or mine:

1) buy S&P 500 and "inverse S&P 500", 100 shares each.
2) within 2 weeks, one of them drops
3) sell all 100 shares of whichover one dropped

According to IRS wording of the wash sale rule, that should be a wash sale.  But according to your view, there should be no wash sale because there's no place for the cost basis to be applied.  In other words, you're saying:

You buy (N) shares of an asset, and sell all (N) shares within 30 days.  If you center a 61 day window around the sale, you must have also bought at least an additional (N) shares of the same asset.  The additional (N) or more shares receive the cost basis of the wash sale.

Still interested in a reputable source for the explanation... an IRS link would be ideal, or maybe a tax attorney who has tried cases before the tax court.  Earlier I visited an article on Kiplinger's website, but the author lacked tax experience according to a bio.

[terran]

I ask again, what do you believe happens when you have a wash sale?

I suggest that what happens is that the invalidated loss is added to the basis of the shares that caused the loss. Do you agree?

If your loss was disallowed because of the wash sale rules, add the disallowed loss to the cost of the new stock or securities (except in (4) above). The result is your basis in the new stock or securities. This adjustment postpones the loss deduction until the disposition of the new stock or securities.

Source: https://taxmap.irs.gov/taxmap/pubs/p550-026.htm#TXMP212cbd13

The basis of the substantially identical property (or contract or option to acquire such property) is its cost increased by the disallowed loss (except in the case of (4) above).

Source: https://www.irs.gov/pub/irs-pdf/i1040sd.pdf (Page D-5)

If the loss is added to the basis of the shares that caused the wash sale, what do you believe happens when you sell those shares?

I suggest that what happens is you now realize the gain or loss represented by the difference between the sale price and the adjusted basis of the shares as supported by the quote above: "This adjustment postpones the loss deduction until the disposition of the new stock or securities." Do you agree?

[Boofinator]

Looking over all the examples in IRS publication 550, every one of them also mentions additional shares (IRS says "new shares", you're saying "replacement shares").  So here's the experiment that I think would prove your point or mine:

1) buy S&P 500 and "inverse S&P 500", 100 shares each.
2) within 2 weeks, one of them drops
3) sell all 100 shares of whichover one dropped

According to IRS wording of the wash sale rule, that should be a wash sale.  But according to your view, there should be no wash sale because there's no place for the cost basis to be applied.  In other words, you're saying:

You buy (N) shares of an asset, and sell all (N) shares within 30 days.  If you center a 61 day window around the sale, you must have also bought at least an additional (N) shares of the same asset.  The additional (N) or more shares receive the cost basis of the wash sale.

Still interested in a reputable source for the explanation... an IRS link would be ideal, or maybe a tax attorney who has tried cases before the tax court.  Earlier I visited an article on Kiplinger's website, but the author lacked tax experience according to a bio.

A question you might want to ask yourself: Why is it called a "wash"? If you sold all the shares you recently bought, what are you "washing"?

[MustacheAndaHalf]

My apologies, I now see that the IRS has 3 events which I thought could be condensed to 2 events.  A wash sale is between two identical sets of assets of equal amount.  The loss from one gets washed out by the purchase of the other.  But if you purchase and sell shares within 30 days, the earlier purchase does not count as part of the wash sale (which the IRS doesn't explain).

My thought was the original shares, bought within 30 days, were "substantially identical" - actually identical - to the shares sold within 30 days.  Meaning a purchase and sale within 30 days forms a wash sale.  The IRS doesn't separate the two sets of substantially identical assets, but you two did that in your explanations.  I now agree the IRS wording is more confusing than it originally appears.

I think the link/quote about adding of cost basis to new shares helps with understanding it.  You can have a wash sale with assets held long term if you buy something else within the 61 day window centered on the sale.  But the purchase and sale of shares within 30 days does not form a wash sale - the purchase of shares is not washed out by the sale of the same shares.  It's only on two separate sets of securities, one of them sold at a loss and one of them acquired within 30 days of the sale.

I agree that in a wash sale, the new purchase of shares also gains the cost basis of the washed out sale.  When that asset is later sold, the cost basis reflects the cost basis of both sets of shares.

[terran]

I'm not sure I quite followed all of that, but yes, I think you've got it.

To take it a step further, even if you DO have a wash sale, once you sell the shares that caused the wash sale you'll now realize that loss since the loss was added to the basis of those shares.

[MustacheAndaHalf]

Yes, I think you followed my earlier incorrect assumptions - your infinite loop analogy.  But I don't expect the IRS to be logical...  For example, if your wash sale includes a new purchase of shares in a Roth IRA, the cost basis disappears - it's gone forever (per your earlier link/quote).  The wash sale washes out with Roth IRA assets, and the cost basis doesn't get added anywhere.

I typically only sell part of my holdings, so I haven't dealt with this difference.  For example, my situation in this thread:

Middle of last month I buy 500 shares, and early this month I buy 50 shares.
If I sell the 50 shares, it's a wash sale with the earlier 500 shares.
If I sell some of the 500 shares, it's a wash sale with this month's 50 shares.

So I look at last month's 500 shares, purchased at different prices.  I pick 50 of the 500 shares with the smallest loss, and sell them (using lot identification).  I deliberately trigger a wash sale - but the smallest one available.

I wait a day, so the wash sale can be recorded at my brokerage.  Then I'm free to sell the rest of the 500 shares at a loss, without a wash sale.

As a side note, when you have multiple assets bought within 30 days, the IRS has several methods.  It looks like Vanguard uses "earliest first" to select where the cost basis of a wash sale goes.

[terran]

Well, the Roth IRA example actually does have a certain kind of logic. The point is to stop you from realizing a loss only to realize a loss -- they don't want you to end up with the same investment returns despite taking the loss as that would make it even easier to game the system. Investments in an IRA don't have basis, so it makes sense that you can't increase the basis in an IRA. In other words, even if you could increase the basis, what effect would it have?

Right, even if you bought 500 shares, did NOT buy 50 shares, and then sold some of the 500 shares within 30 days of buying then you have a wash sale in equal proportions to the purchase/sale. For example if you sell 100 shares, then all of them are a wash sale and 100 of the remaining 400 will receive the increased basis. However, if you sell 400 then only 100 shares are a wash sale and all of the remaining 100 receive the increased basis and you can claim the loss on the other 300 you sold.

Similarly, in your example of buying 500, then buying 50, then selling 50, you have a wash sale on all 50 you sold, but you only increase the basis on 50 of the 500 you bought.