Wash sale?

[FEDUKE404]

Wash sale and "replacement" stock?

No, neither one of us is confused, I think we both know exactly what the other is saying. Your opinion/interpretation is shared by a commentator at www.fairmark.com, a well regarded investment site.

http://www.fairmark.com/capgain/wash/wsreplac.htm

(I am posting this link as I don't believe the site is a competitor to TaxMaterials Inc, but if the moderator disagrees, so be it).

The disagreement is, both you and the Fairmark commentator are using the word or concept of REPLACEMENT stock. He comes right out and says it: "You don't have a wash sale unless the shares you bought "replace" the shares you sold."

The problem I have with that is neither the code nor the regulations use the word "REPLACE" or anything similar. They simply mention acquiring stock. To me, an acquisition is an acquisition is an acquisition, whether it "replaces" something or not. In fact, the concept of "REPLACE" completely falls apart when you look at the 30 days prior to the wash sale -- how can one "REPLACE" something in advance of selling it?

The Fairmark article also claims the IRS agrees, but provides no support or citations whatsoever for this claim.

So, you have an interpretation of the law that I don't agree with. My argument is that you are inserting the meaning "REPLACE" when the law uses no such language. Do you have any authority for interpreting the concept of REPLACEMENT into the law?

I'm not a tax attorney. I care not to argue "interpretation" matters nor go chasing citations in the tall grass. If you care to parse "replacement," then go for it fully.

A wash sale is created when essentially identical stock is bought, within the restrictive time frame specified by the IRS, and whenever shares of the stock in question have been (or will be!) sold at a loss. The true "loss" on the sale is modified, meaning the allowable loss is smaller than the "true" loss (proceeds less purchase cost), due to the IRS wash sale restrictions (code W on Form 8949). The cost basis of the newly purchased "replacement" stock is adjusted accordingly.

I've seen numerous instances where national brokerage firms determine and report, on their Forms 1099, the existence of wash sale events, to include a couple for the current tax season. Can they all be equally misinformed about the rules for wash sales ? ?

Good look on your quest.

FE

[Lion]

The Master Tax Guide says Purchased, not Repurchased. Where do you find that you have to purchase it more than once during 61 days to make the sale a wash sale? I need to get this straight in my head as my clients are finally receiving their re-revised 1099-Bs.

[Rapid Robert]

The Master Tax Guide says Purchased, not Repurchased. Where do you find that you have to purchase it more than once during 61 days to make the sale a wash sale? I need to get this straight in my head as my clients are finally receiving their re-revised 1099-Bs.

They don't find it; they are spinning the words of the law as they wish. Burke doesn't even seem to know about the 30-day prior rule, according to his last post where he only mentions the 30-day after rule.

I provided support by stating that the law uses the word "acquired". No one, including Fairmark who agrees with FEDuke, provides any support or citations for using the word "replacement".

I am not on a "quest", I don't currently have any clients with this fact pattern. So good luck to you all also. I realize if someone files it the way they way they would like to, most likely it will go through; not my problem. I also acknowledge that this could well end up as a court case if someone were to push it far enough; that would be a great way to get an answer, until then it's just a disagreement over interpretation. Tax preparers do have to interpret laws, whether they are attorneys or not.

[FEDUKE404]

Wash sale per the IRS

For those of you may still place some faith in IRS publications, this is from Pub 550:


Wash Sales

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:

1 - Buy substantially identical stock or securities,

2 - Acquire substantially identical stock or securities in a fully taxable trade,

3 - Acquire a contract or option to buy substantially identical stock or securities, or

4 - Acquire substantially identical stock for your individual retirement account (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.

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. Your holding period for the new stock or securities includes the holding period of the stock or securities sold.

It all seems fairly clear to me. Note the words "buy" and "acquire" with no reference to "replacement."

Also you cannot make any end-runs by using spousal accounts and/or IRA retirement accounts for the stock involved during the restrictive time period. Harder to find (and catch), but "them's the rules!!"

FE

[Roland Slugg]

In all the reading I’ve done about wash sales, the examples always refer to three steps: (1) An original purchase of Stock X, then (on a day more than 30 days later) (2) a sale of Stock X at a loss, and (3) a second purchase of Stock X within 30 days before or after that sale. Simple enough.

A few weeks ago, however, I encountered a fact pattern where there was no second purchase, but where step (2) occurred not “more than 30 days later” but fewer than 30 days later, and the sale, which yielded a loss, was for only a portion of the recent, original purchase. At that time I had not seen the investor’s 1099 package from his broker, but it got me wondering if the loss on that sale could, indeed, be a “wash sale.”

After consulting two or three reference sources and finding only examples using the three steps referred to above, I turned to the Code itself. Wash sales are covered in §1091, and the relevant subsection is §1091(a). This is what it says ... in its entirety:

(a) Disallowance of loss deduction
In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange on which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction shall be allowed under section 165 unless the taxpayer is a dealer in stock or securities and the loss is sustained in a transaction made in the ordinary course of such business. For purposes of this section, the term “stock or securities” shall, except as provided in regulations, include contracts or options to acquire or sell stock or securities.

After reading the above several times, I eliminated the parenthetical phrase and all the other nonessential wording, reducing the paragraph to the following:

(a) Disallowance of loss deduction
In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired substantially identical stock, then no deduction shall be allowed under section 165.

I have read that abridged version of Code §1091(a) several times and do not see where it requires a second purchase. Wasn’t the first (and only) purchase the acquisition of identical stock ... and within 30 days of the sale resulting in a loss? Accordingly, I concluded, albeit with considerable nagging doubt, that the loss was a wash sale.

A few days later I saw the broker’s 1099-B, and the loss on that sale was not coded as a wash sale. Accordingly, I reported the loss on the T/P’s return, not because I thought it was correct but because I’m sure the IRS will never question it.

The broker, by the way, happens to be Scottrade, and Scottrade has published an article about wash sales (which interested readers can easily find on the internet), including therein an example with a similar fact pattern as the one in the OP here. The article states that the loss is not a wash sale, because there can be no wash sale from selling a portion of the original purchase. Unfortunately, the article contains no reference to support that conclusion.

If you believe that based on the facts as presented in the OP there was not a wash sale, then consider this economically identical but slightly different set of facts: Instead of buying 1,000 shares of stock in a single transaction on May 20, 2016, suppose the investor had purchased two lots of 500 shares each, both at the same price. This can easily happen with electronic trading these days if the buyer does not add a limiting “all or none” requirement when placing the buy (or sell) order. Now would the sale at a loss 25 days later be a wash sale? It seems absurd that the second set of facts would result in a wash sale but the original set of facts does not. Makes one wonder.

I hope those who have read this thread have enjoyed the ensuing discussion, and I thank everyone for their added contributions.

[FEDUKE404]

What a maze. . .

Guess we know why Scottrade doesn't give tax advice. . .

Merely selling a stock at a loss can never generate a wash sale.

But, once such a sale for a loss has occurred, a separate purchase +/- 30 days can create a wash sale where the loss is reduced and the cost basis of the "replacement" stock is adjusted.

I guess the code / whatever has not caught up with the scenario where the original "purchase" can actually be. . . .several purchases, all tracked separately. FWIW, I've seen live trades execute in such a manner, but the later info shows a single purchase for a single cost that covers all the "pieces."

To avoid any rabbit-chasing, I just suggest and follow rules of not even getting CLOSE to a wash sale scenario (time restraints). And, as stated somewhere upthread, I've seen numerous instances where the Form 1099-B information **DOES** show "wash sale" and an appropriate adjustment amount that later appears on Form 8949. Those folks must know something!

FE