Some investors repeatedly buy and sell stock in a particular company in response to changes in the stock price. However, individuals who repurchase corporate stocks too soon after selling identical stocks at a loss must postpone the loss and report the sales transaction as a wash sale.
Because taxable stock sale gains can be offset by stock sale losses, investors sometimes sell stocks that have fallen in price to harvest the available loss. If the stock has long-term potential, it may be purchased once again. The wash sale rule is intended to limit the use of stock sales simply to offset otherwise taxable gains.
30-day wash sale window
A wash sale occurs when a stock is purchased within 30 days of selling a substantially identical stock. The sale must be reported for tax purposes, but the wash sale loss cannot be used to offset gains on other stock sales. Even though a wash sale must be reported on your tax return, the net result is similar to having never made the wash sale in the first place.
Form 8949 adjustment
A wash sale is reported on IRS Form 8949, along with all other stock sales. The difference in reporting a wash sale is that the loss is essentially reversed. For each stock sale, Form 8949 contains two entry boxes that can be used to designate a wash sale as such. One box should contain an adjustment amount to reverse the wash sale loss, and the other box should contain code "W" to identify the reason for the adjustment.
Effect on Schedule D
Along with any wash sales, Form 8949 also contains a detailed list of asset dispositions. Form 8949 is essentially a supporting document for IRS Schedule D, which is the form that actually compares gains with losses. The net gain or loss from Schedule D is entered on Form 1040.
The disallowed loss is not lost forever. The wash sale loss is added to the cost of the new stock to arrive at the cost basis for the new stock. The new cost basis is then used at a later date to determine gain or loss upon disposition.
A wash sale can also occur if replacement stock is purchased within 30 days prior to the sale of a substantially identical stock. The wash sale rules apply only to losses. All stock sale gains are entered on Form 8949 as usual, and there is no wash sale adjustment code for gains. Contact an accountant such as Kenneth L Lahner CPA for more information on tax return preparation.