INCOME TAXATION
DEALINGS IN PROPERTIES – WASH SALES
Wash Sales
 Occurs when an investor sells or
trades a security at a loss, and
within 30 days before or after, buys
another one that is substantially
similar.
 It also happens if the individual
sells the security at a loss, and their
spouse or a company they control
buys a substantially similar security
within 30 days.
 The wash-sale rule prevents
taxpayers from deducting a capital
loss on the sale against the capital
gain.
A wash sale under the following
circumstances:
1. There was a sale of stock or
securities at a loss
2. Within a period of beginning thirty
days before, and ending thirty days
after, the date of sale or disposition
(known as the sixty-one-day
period), there was an acquisition of
shares or securities (or option to
acquire)
3. The acquisition, or option, should
be by purchase or exchange upon
which gain or loss is recognized
under the income tax law;
4. The stock or securities acquired
were substantially the same as
those disposed of;
5. The taxpayer is not a dealer in
securities (merely an investor)
When are the stock or securities
substantially identical?
Stocks or securities are
substantially identical when they are the
same in all important particulars. Thus, the
stock or securities of one corporation
cannot be substantially identical with the
stock or securities of another corporation.
Common stock of a corporation cannot be
substantially identical with preferred stock
of the same corporation.
How should be the substantially identical
stock or security be acquired?
It should be acquired by purchase
or exchange upon which income tax gain
or loss is recognized.
Thus, if 61-day period acquisitions by way
of:
a. Inheritance
b. Gift
c. Merger or consolidation (share-for-
share swap)
They shall not be considered as wash sales
If an option contract to purchase or
exchange was entered into within the
sixty-one-day period, the condition on
period will have been satisfied even if the
option was exercised outside the sixty-one-
day period.
Who is a dealer in securities?
A dealer in securities is a merchant
of stocks or securities, whether an
individual, partnership, or corporation,
with an established place of business,
regularly engaged in the purchase of
securities and the resale thereof to
customers; that is, one who, as a merchant,
buys securities and re-sells them to
customers with a view to the gains and
profits that mat be derived therefrom. (Sec.
22(U) of the NIRC)
Illustration:
#1
Mr. Gloc, who is not a dealer in securities,
sold at a loss 100 shares of common stock
of Nine Co., a resident corporation. One
day before the sale at a loss, he bought 100
shares of common stock of the same
corporation. There was an acquisition
within the 61-day period (one day before
the sale at a loss). The loss is a loss on a
wash sale. The loss on the sale of 100
shares is not deductible.
#2
Mr. Shanti, who is not a dealer in
securities, sold at a loss of 100 shares of
common stock of Dope Co., a resident
corporation. On the next day, he bought
150 shares of common stock of the same
corporation. There was an acquisition
within the 61-day period (one day after the
sale). The loss is a loss on a wash sale. The
INCOME TAXATION
DEALINGS IN PROPERTIES – WASH SALES
loss on the sale of 100 shares is not
deductible.
#3
Mr. Apl, who is not a dealer in securities,
sold at a loss of 100 shares of common
stock of Deap Co., a resident corporation.
One day before the sale, he bought 60
shares, and one day after the sale, he
bought 40 shares, of a common stock of
the same corporation. There were
acquisitions within the 61-day period (one
day before and one day after the sale). The
loss on the sale is a loss on a wash sale.
The loss on the sale of 100 shares is not
deductible.
Why is a loss on a wash sale not
deductible?
Because the sale of one hundred
shares (in the preceding illustrations) is
matched by acquisition of one hundred
shares. On the one hundred shares sold
with the covering acquisitions of one
hundred shares, there was no economic
change brought about. The taxpayer, after
the acquisition, is where he was before –
with one hundred shares.
Indeed, there was no need to go
into the twin transactions of sale
acquisitions. If there was an intention to
show a loss for deduction from gross
income, the loss was a fictitious loss, as
there was no economic loss.
Illustration: #1
Mr. Alpha, not a dealer in securities, on
December 27, 2020, sold for P90,000,
1,000 shares of common stock of B Co., a
resident corporation, that he acquired on
January 20, 2020 for P110,000. On
January 5, 2021 or nine days after the sale,
he acquired 900 shares of common stock
of the same company for P90,000. What
are the tax consequences of these
transactions?
Procedure:
Step 1:
Arrange the transactions on the shares of
stock in order of their dates, their
acquisitions or disposition:
January 20, 2020 – Acquisition of 1,000
shares
December 27, 2020 – Sales of 1,000 shares
acquired on January 20, 2020
January 5, 2021 – Acquisition of 900
shares
Step 2:
Determine the loss on the sale on which
rules on wash may apply
Selling Price P 90,000
Less: Cost 110,000
Loss on the sale P(20,000)
Step 3:
With the sale at a loss as the starting point,
go up and identify the acquisitions within
30 days before the sale, and go down and
identify the acquisitions within 30 days
after the sale. Including the date of sale at
a loss, this gives the 61-day period.
January 20, 2020 – Acquisition of 1,000
shares
December 27, 2020 – Sales of 1,000 shares
acquired on January 20, 2020
January 5, 2021 – Acquisition of 900
shares
Step 4:
Match the number of shares at a loss with
acquisition within the 61-day period. How
many shares sold at a loss were covered,
and how many were not covered by
acquisitions?
On the shares sold at a loss with covering
acquisitions, no loss will be recognized.
On the shares sold at a loss without
covering acquisitions, capital loss will be
recognized.
What happens to the loss not recognized
on a wash sale?
The loss not recognized will
become part of the basis of the shares
acquired within the sixty-one-day period
with the formula:
Cost of the Shares acquired within the 61-
day period
Add: Loss not recognized on the wash
sale/deferred loss
INCOME TAXATION
DEALINGS IN PROPERTIES – WASH SALES
Adjusted cost of the shares acquired
within the 61-day period/TAX BASIS
And if the shares acquired within
the sixty-one-day period are sold, the gain
or loss on the sale will be computed with
the formula:
Selling Price
Less: Adjusted cost/tax basis
Gain or loss on the sale
Step 5:
Compute the adjusted cost of the shares
acquired within the 61-day period
Continuing with our illustration, if the
shares acquired within the 61-day period
were sold for P130,000, the gain on the
sale would have been P22,000 computed
as follows.
Step 6:
Compute the gain on the sale
shares of common stock of the same
company for P47,000. What are the tax
Illustration: #2
consequences of these transactions?
Mr. Beta, a dealer in securities, on October
Answer:
21, 2020, sold for P50,000, 1,000 shares of
Beta is a dealer. The loss on sale of
P15,000 is deductible from gross income.
Selling Price P50,000
Cost 65,000
Loss (Ordinary) P(15,000)
The cost of 900 shares of common
stocks of the same company purchased
for P47,000 will not be adjusted.

Don’t Forget:
 If shares sold are not domestic,
they are subject to rules on capital
gains and losses (holding period for
individuals and provisions for net
capital loss carry-over)
 Observe situs rules

common stock of Vid Co., a resident

corporation, that he acquired on January 4,
2020 for P65,000. On November 16, 2020
or 20 days after the sale, he acquired 900
INCOME TAXATION
DEALINGS IN PROPERTIES – WASH SALES
 For securities such as bonds, there
is no CGT, also observe rules on
capital gains and losses and situs
rules
Codal Reference: SEC. 38 paragraph A, B,
and C.