A Wash Sale occurs when you take a loss upon closing a position within 30 days (before or after the sale date) of opening a position in the same or substantially identical security.
The purpose of this federal regulatory requirement is to disallow a taxpayer from deducting a loss on his tax return when his financial position remains relatively the same after the loss.
As of January 1st of 2011, the IRS changed the way that brokerage firms must report cost basis for each position and account for any wash sales. Under the new IRS rules, we have to add the disallowed loss on the sale to the cost of the new position. Once the position is closed, and 31 days have passed before opening it again, the loss can be taken.
Schwab identifies wash sales during an overnight process, and during the next trading session, StreetSmart Edge displays a"W" indicator in Lot Level Details for a position in the Positions tab.
On 9/30, you buy 100 shares of ABCD at $15.00. You close out your position in ABCD at $12.50 on 11/15 and take a $2.50 per share loss. Then you buy back into the position -- 100 shares at $13.00 on 11/30.
At this point the sale on 11/15 is a wash sale and you would not be able to deduct the loss on your taxes until you sell the new position (and then stay out of the position for at least 30 days). However, the $2.50 loss is added to the cost basis of the new position, making your new cost basis $15.50.
You own 100 shares of XYZ at $15.00. Later on, you buy 100 more shares at $12.00, then 17 days later, you sell 100 shares at $13.00. If your cost basis accounting method is set to FIFO (first in-first out), the sale would result in a loss, and the proximity of the $12 purchase to the sell date would make this a wash sale.
The loss would be added to the cost basis of the second position, showing a $14.00 cost basis ($12 + $2).
For more information on Wash Sales, log on to Schwab.com and go to Guidance > Taxes. Then click Cost Basis Reporting > FAQs and under the Specific Situations tab, wash sales are addressed in more detail.
The information and content provided here is general in nature and is for informational purposes only. It is not intended, and should not be construed, as a recommendation; as legal, tax, or investment advice; or as a legal opinion. You should contact your tax advisor to help answer questions about your specific situation or needs prior to taking any action based upon this information.