Do wash sales only matter if you are net negative on the year?

K

Kaga

I'm trying to better understand the wash sale rule, so I wonder:

Do losses on transactions that count as "wash sale" get subtracted from your overall gains on the year, or do wash sale losses not count as losses period?

If wash sale losses do not count as losses at all, imagine the following situation:
+ 30k profit overall on the year
- 20k losses on the year (but 15k losses are wash sales)

Do you get taxed on 30k-20k=10k gains, or on 30k-(20k-15k)=25k gains?
 
You'd be taxed on $25k gains.

However... your $15k is wash-sale losses would be added to the cost basis of future trades such that you'd be able to make up those losses tax free.

In general, wash sale losses have no net effect on you overall... EXCEPT (1) may shift some gain/loss from one year to the next, and (2) if you had a wash sale loss and NEVER made more future profits than the wash sale disallowance, then the wash-sale disallowance become permanent.

Said another way... in this example... if you had a $15k wash-sale disallowance this year, you could make up that $15k, tax free next year.... assuming of course that you had $15k in profits the next or subsequent years.
 
Kaga said:
I'm trying to better understand the wash sale rule, so I wonder:

Do losses on transactions that count as "wash sale" get subtracted from your overall gains on the year, or do wash sale losses not count as losses period?

If wash sale losses do not count as losses at all, imagine the following situation:
+ 30k profit overall on the year
- 20k losses on the year (but 15k losses are wash sales)

Do you get taxed on 30k-20k=10k gains, or on 30k-(20k-15k)=25k gains?
More...
Do a search here for "wash sales", lots of ink spilled on it. In short, if you are flat over a 30 day period that includes Dec 31st then the wash sales have no impact on taxes. Many people just stop trading the same security starting Dec 1 and running to the new year, at which point they're fine.
If you disregard that advice, a wash sale just requires that instead of booking a loss (they don't apply to gains) you adjust the basis of the next purchase in the chain. For example, if you bought a position in stock x for $1000, sold for $800, and then bought it again for $700, your basis in that purchase is actually $900 ($700 + the $200 loss). This means that when you eventually break the wash chain for 30 days over a tax year you get that loss back, for example if that next July you sold the position for $700 and didn't buy it back again then that tax year you could claim a $200 loss (your basis of $900-price you sold of $700). So it just delays your ability to take the loss by a year or more depending how long you keep doing wash sales on that security or one exactly like it.
 
Scataphagos said:
You'd be taxed on $25k gains.

However... your $15k is wash-sale losses would be added to the cost basis of future trades such that you'd be able to make up those losses tax free.

In general, wash sale losses have no net effect on you overall... EXCEPT (1) may shift some gain/loss from one year to the next, and (2) if you had a wash sale loss and NEVER made more future profits than the wash sale disallowance, then the wash-sale disallowance become permanent.

Said another way... in this example... if you had a $15k wash-sale disallowance this year, you could make up that $15k, tax free next year.... assuming of course that you had $15k in profits the next or subsequent years.
More...

Wash sale losses are never permanent since they are carried with the cost basis of an active position. Assuming at some point in the future you exit that position, the wash sale loss will be recognized. The only time a wash sale loss can be permanent is when you have wash sale losses across a taxable account and an untaxable account like a Roth IRA.
 
sprstpd said:
Wash sale losses are never permanent since they are carried with the cost basis of an active position. Assuming at some point in the future you exit that position, the wash sale loss will be recognized. The only time a wash sale loss can be permanent is when you have wash sale losses across a taxable account and an untaxable account like a Roth IRA.
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Scenario....

End of year... trader makes a BIG play, takes a loss, rebuys the same security within 30 days and it's again a loser and sells before Dec 31 = wash sale disallowance. Then, discouraged trader quits trading/investing and so never makes a capital gain equal to his disallowed wash-sale loss. Hasn't that disallowed loss become permanent?
 
Scataphagos said:
Scenario....

End of year... trader makes a BIG play, takes a loss, rebuys the same security within 30 days and it's again a loser and sells before Dec 31 = wash sale disallowance. Then, discouraged trader quits trading/investing and so never makes a capital gain equal to his disallowed wash-sale loss. Hasn't that disallowed loss become permanent?
More...

You get to take the combined capital loss on the second loser because you didn't trade it for 30 days after the last sale. So you take the capital loss in that Dec tax year. Of course, another problem is the $3k limit per year on capital losses so it could take awhile to realize the entire loss.
 
I'd say it depends on your income for the year. Wash sales are not deducted from income. Take the loss, don't trade it for a month and deduct it from your income. You're welcome. :)
 
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