Q: What is a wash sale?

A: It is a sales or other disposition of stock securities where substantially identical

securities are purchased within 61 days, beginning 30 days before the sale and
ending 30 days after the sale.
Q: What period?
A: 61 day period beginning 30 days before and ending 30 days after the sale
Q: Jan 20 you purchased share of stock, and disposed of the same on Feb 5, 2005. Is
this a wash sale?
A: No
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2) gains from wash sale are taxable but losses are
non-deductible Exception: "unless claim is made by a dealer in stock or securities
and with respect to a transaction made in the ordinary course of the business of
such dealer
Q: Reason why losses in wash sale cannot be deducted?
A: 1. to avoid too much speculation in the market
2. taxpayer not telling the truth, because he may say he incurred a loss instead of a
gain

The saving grace of making a poor stock or mutual fund investment is that
you at least get a capital loss when you sell. The loss can then offset gains
from your more successful investments, unless the dreaded wash sale rules
disallow your writeoff. Heres the scoop on this nasty little piece of the tax
code.
The skinny on wash sales
Your anticipated tax loss is disallowed if, within the period beginning 30 days
before the date of the loss sale and ending 30 days after that date, you
acquire substantially identical stocks or securities. For purposes of this
article, lets call them replacement securities.
According to the tax law, your loss transaction and the purchase of the
replacement securities are a wash, so you shouldnt be allowed any tax
benefits. Please understand, however, that this righteous concept applies
only to losses. If you sell for a gain and buy back identical stocks or
securities within the above time frame, Uncle Sam is happy to collect his due
with no qualms. (Among us tax professionals, this is known as a heads I win;
tails you lose rule.)
Options are included in the definition of stocks and securities, so you can
also have a wash sale when you unload options at a loss.
But for the wash sale rules to come into play, the stocks or securities must
truly be substantially identical. Stocks or securities issued by one corporation
are not considered substantially identical to stocks or securities of another.
What about replacing one S&P 500 index mutual fund with another?
Unfortunately, the IRS begs the question by saying only that all
circumstances must be considered in evaluating whether stocks or securities
are substantially identical. What the heck does that mean? Nobody knows. In
my opinion, no mutual fund is substantially identical to another. That said,
you should be wary of selling, for example, one S&P 500 index fund for a loss
and then buying into another S&P 500 index fund within 30 days.
Also, dont think you can have your spouse buy identical replacement
securities without running afoul of the wash sale rules. Your tax loss is still
disallowed. Ditto if your controlled corporation or IRA makes the buy,
according to the IRS.
What happens to your loss?
The only good news about wash sales is that your disallowed loss doesnt
just go up in smoke. Instead, it gets added to the basis of the replacement
securities. When you sell them, your disallowed loss effectively reduces your
gain or increases your loss on that transaction. Also, the holding period of
the wash sale securities is added to the holding period of the replacement
securities, which increases your odds of qualifying for the favorable tax rate
(15% for most folks under the current rules) on long-term capital gains.
Example 1: Say you purchased 100 shares of XYZ Co. on Dec. 1, 2015, for
$2,000. On April 1, 2016, you sell the shares for $1,200, thus incurring an
$800 short-term loss. But on April 10, 2016, you have a change of heart and
buy back 100 shares for $1,300. Your $800 loss is disallowed, but it gets
added to the basis of the replacement shares. So your basis becomes $2,100

($1,300 plus $800). In addition, the holding period for the replacement
shares includes the Dec. 2, 2015, through April 1, 2016, holding period of the
shares for which the loss was disallowed. When you file your 2016 return,
report the wash sale on Part I of Form 8949, which feeds into Schedule D,
since it was a short-term transaction (See the Schedule D instructions for full
details on reporting wash sales).
What happens if the number of replacement shares purchased during the
forbidden 61-day period is less than or greater than the number of shares
sold in the loss-sale transaction? Good question. The following two examples
illustrate the answers.
Example 2: You bought 100 shares of XYZ Co. on Dec. 1, 2015, for $2,000.
You then bought an additional 50 shares on March 1, 2016, for $1,200 and
another 25 shares on March 10, 2016, for $650. On March 27, 2016, you sold
all the December shares for $1,300, thus incurring a $700 loss. However,
since you bought 75 replacement shares within 30 days of the loss sale, 75%
of your loss ($525) is disallowed. You can deduct the other 25% ($175). Add
two-thirds of the disallowed loss ($350) to the basis of the 50 shares bought
on March 1. Add the remaining $175 of disallowed loss to the basis of the 25
shares bought on March 10. So the basis of the 50 shares becomes $1,550
($1,200 plus $350) and the basis of the 25 shares becomes $825 ($650 plus
$175). Also, you get to extend the holding period for both sets of shares by
the Dec. 2, 2015, through March 27, 2016, holding period of the 75 shares
for which the loss was disallowed.
Example 3: You bought 100 shares of XYZ Co. on Dec. 1, 2015, for $2,000.
You then bought an additional 100 shares on March 1, 2016, for $2,400 and
another 50 shares on March 10, 2016, for $1,300. On March 27, 2016, you
sold all the December shares for $1,300, thus incurring a $700 loss. Since
you bought 150 replacement shares within 30 days of the loss sale, your
entire loss is disallowed. In this case, you add the entire disallowed loss to
the basis of the first 100 replacement shares, which are those purchased on
March 1. So the basis of those shares becomes $3,100 ($2,400 plus $700).
You also get to extend the holding period for those shares by the Dec. 2,
2015, through March 27, 2016, holding period of the 100 shares for which
the loss was disallowed.
Mutual FUND SHARES
The wash sale rules apply equally to losses from sales of mutual fund shares.
In fact, wash sales are quite likely if you have arranged for automatic
reinvestment of your dividends. Again, the disallowed loss is added to the
basis of the replacement shares purchased within the forbidden 61-day
period.
This story has been updated.