Wash Sales

If you both acquire shares (through purchasing or RSU vesting) and sell shares at a loss within 30 days before or after the acquisition, then wash sale rules greatly complicate the tax computations: loss amounts must be allocated to the basis of your acquired shares. The easiest approach is to avoid creating the overlap in the first place — do not sell at a loss within the window around a vesting or purchase. Once a wash sale exists, the basis adjustment is mandatory, not optional: your broker reports it on Form 1099-B for covered shares, and your return must match.

• Deferring taxes until later is not always the best strategy. E.g., if your income drops significantly, it may make sense to pay taxes now, but your income will typically need to drop by 1/2 to 3/4 to benefit much.
• An example of the complication is that, if the number N of shares of your loss is less than the number of shares of your acquisition, you must split the acquisition shares into two groups, one with N shares absorbing the loss and one containing all the other shares. Thus, you cannot track share basis based on date anymore.

Understand what the rule actually does, because it is routinely described wrongly. IRC §1091 operates transaction by transaction, not on your aggregate net result for the year: every sale at a loss with a matching acquisition inside the 61-day window is disallowed on its own terms, whether or not you finished the year up. What the rule almost never does is destroy the loss. The disallowed amount is added to the basis of the replacement shares under IRC §1091(d), and the replacement shares inherit the original holding period, so the deduction is deferred to whenever you finally close the position for good — not forfeited.

Trace it through. You buy Coca-Cola (KO) at $58 and sell at $62: a $4 gain, and no wash sale, because §1091 reaches losses only. You buy back at $63 and sell at $59: a $4 loss. You then buy again at $58 — inside 30 days of that loss sale — so the $4 loss is disallowed and rolls into the new lot’s basis, which becomes $62. Selling that lot at $60 produces a $2 loss, not the $2 gain the cash flows suggest. Recognized for the year: $+\$4-\$2=\$2$, which is exactly the economic result $(\$62-\$58)+(\$59-\$63)+(\$60-\$58)$. The wash sale moved the deduction; it did not delete it.

Two situations break that reassuring symmetry, and both matter more than the arithmetic above:

You are still holding the replacement at year-end

The gains are taxed this year and the matching loss sits in the basis of a position you have not sold. December is when this bites: a loss harvested on 20 December and replaced on 28 December is disallowed in the year you needed it and deferred into the next. Close replacement positions before year-end, or leave the 31-day window clear, if you are harvesting to offset a realized gain in the same year.

You bought the replacement inside an IRA or Roth IRA

The loss is disallowed permanently, with no basis adjustment anywhere — the deferral machinery of 1091(d) has no taxable account to attach to. Revenue Ruling 2008-5 is explicit, and it reaches purchases by your IRA even though the accounts are legally distinct. Turn off automatic reinvestment in retirement accounts holding anything you also harvest in taxable, and coordinate across a spouse’s accounts too.

For an active trader the year-end version is not a footnote; it is the central problem. A book that churns the same names all year can finish flat and still owe tax, because the gains were recognized and the offsetting losses were serially disallowed into open positions. That specific failure — not the expense deductions — is what the §475(f) election in the next section exists to solve.