I’ve known about wash sales for a while and what I always thought it meant was when you sell a stock at a loss and then buy it back within 30 days. The IRS sees this as just a way to harvest some losses without actually changing what you invest in, a move done solely for tax purposes. So what they do is say you have to defer that loss until you sell the shares permanently. But when I have shares bought at different times and then sell some of those shares, I would rather show a gain than hassle with deferred losses from a wash sale.
As the market was dropping in 2008 I would buy more shares of some mutual funds, like Janus Overseas. As the market continued to drop, I kept buying more. Eventually it bottomed out in March 2009 and soon started going up like crazy. Not sure the market would hold, I thought it would be good to sell the shares I had bought at the bottom and lock in a gain. This had worked out really well with some individual stocks, particularly Suntrust which had some crazy swings in the preceding year. Anyway, I bought my last batch of shares of Janus on March 2 and by March 27 those shares were up 20%, so I sold them. But the average cost of all of my shares on March 27 was still less than what I was selling them for, so it would count as a loss. When I got my 1099 from Janus, it said this was a wash sale. I checked to make sure I had not bought the shares back and I had not (in fact the market kept going up and I kept selling off more batches of shares). Why would Janus say this was a wash? So I researched wash sales further and found out that not only is it a wash when you buy back the same shares later, but even if you buy back the shares before you sell them! I guess the thinking is that a person might buy shares at a low point and then sell them at about the same price and declare a loss by identifying the earlier shares they owned. This never occurred to me. The annoying thing is the loss was only $77 total and now I have to distribute that $77 over my remaining shares (which isn’t a big deal really because my spreadsheet I use for investments lets me override the average cost of that sale with whatever value I want).
Now knowing about this pre-wash sale business, I went back to see if I had any of those on Suntrust shares that I had been playing around with. And sure enough, I had some shares that I showed as a $600 loss when I had bought shares less than 30 days prior. The only way to avoid a wash sale was to say I was selling the shares I had just bought and show a $200 gain. Ouch. I was able to counter that somewhat by selling some of those expensive shares at a loss later in the year when wash rules wouldn’t apply, but I couldn’t wipe out all of the difference. Because I was showing a loss on the year and offsetting income, that means I would have to pay taxes on 25% of the difference, so it was over $100. And then, as I was writing this, it occurred to me that I might have something similar on shares other than Suntrust, and once again, the same thing had happened with some Microsoft shares. I had no idea. Then I went back to 2008 and noticed I had declared a few losses that really should have been wash sales too, but don’t tell anybody.
In the end, it all works out. If I can’t declare losses now, then it just increases the cost basis of the shares I have left meaning I will have smaller gains later on. So it’s all kind of a game. But I was trying to always sell the most expensive shares in order to show a loss now and then hope that when I sell the other shares at least they will be long term gains taxed at 15% instead of 25%. I guess the advantage of a wash sale for the taxpayer is that I could defer the loss but owe nothing in taxes (since it doesn’t count as a gain or loss), whereas if I show a gain, I definitely have to pay right now. I’d still rather not worry about it and just bite the bullet on the gain right now. Unlike with the Janus shares where they know whether I have a wash sale or not, my broker has no idea since they don’t know which shares I’m identifying as being sold. So it easy to mess this up.