Wash Sale Rule and IRS Schedule d - a major headache for active traders and investors

Of all the accounting operations necessary for active traders to submit their taxes, calculating wash sales should be the most daunting. When trading the same stocks over and over again, buying and selling unequal amounts, making small gains and losses, hundreds or thousands of wash sales are inevitably generated.

Therefore, this rule is incredibly awkward when it comes to compiling a proper contingency planning. How can a rule that seems to cause confusion as both simple and headache? Continue reading ...

What exactly is the rule sale wash?
IRS publication 550 page 52 states:

"You can not deduct losses from sales or trades of stock or securities of a wash sale A wash sale occurs when you sell or trade a security or securities at a loss, and within 30 days before or after the sale of: . buy substantially identical shares or securities, to buy substantially identical stock or securities in a completely passive trade, or buy a contract or option to buy substantially identical stock or securities. "

"If you sell shares and your spouse or a company purchase controlling shares essentially the same, you also have a wash sale."

The IRS also states that "If your loss has been canceled due to the wash sale rules, add the loss to the allowable cost of the new stock or securities. The result is your basis in new stock or securities. This adjustment referred the loss deduction until the disposition of the new stock or securities. your holding period for the stock of new securities on the same day or the beginning of the retention period of the stock of securities sold. "

Put simply, this means that if you close a trade and take a loss, and then repurchase the same or "substantially" the same equity, you can not take the loss at that time.

According to the IRS, the loss must now move forward, and must be included in the cost base of business in which it repurchased the same stock. If you conclude that trade in a loss because of the new cost basis, and you buy the stock again the same, the loss is moved forward again.

This can keep going indefinitely if you continue to trade the same equity again and again and keep ending up with a loss, and stop trading for at least 31 days.

Moreover, the holding period of your business may also change, thus changing the tax wash sale. I'm sure you can see how to calculate and keep track of the many nuances of this rule is the worst nightmare of an active trader and, potentially, could end up costing you money at tax time.

Here are just a brief look at some of the other problems associated with the accounts wash sale. We will cover each of these topics in depth as our series continues.

Wash sales on unequal numbers of Shares - When you purchase new shares in increments not equal to the number of shares sold at a loss, it is the responsibility of the trader to determine the particular shares to which the wash sale rule applies. This requires complex matching and splitting of shares in the order in which the shares were bought and sold.

Wash on short sales - If you sell the stock short, this adds a new dimension to the wash sale rule because you must also now be affected sales rather than purchases that trigger wash sales. When you buy-to-cover a short sale and take a loss, if you short that stock again within 30 days, you will trigger a wash sale.

Wash Sales between Stocks and Options - If you take a loss on a stock or option then buy an option on the same stock within 30 days of the window, you will also have triggered a wash sale.

You might think that the IRS only wants to see sales of washing that cause losses to be deferred to another fiscal year, but this is not the case. The IRS requires that operators report any wash sales throughout the year. This means that every time a title that is sold at a loss is regained within + / - 30 day window, a wash sale must be reported on schedule d.

Consequently, an active trader can have hundreds or even thousands of wash sales throughout the year. Even the casual investor may be plagued with having to report some or a lot of wash sales events. What every trader must therefore, is an automated method to deal with this headache. Fortunately there is such software .......