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Question about the "Wash Sale Rule"
Old 10-08-2009, 02:09 PM   #1
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Question about the "Wash Sale Rule"

Here is a question for you tax wizards.

Earlier this year, I took advantage of the lower stock market to make changes to my portfolio. I sold a tax inefficient mutual fund in my taxable account and bought fewer shares of that same fund in my IRA on the same day.

So let's say I sold 500 shares of that fund in my taxable account and bought only 400 shares of that same fund in my IRA. According to Turbotax, I can still claim a partial tax loss as the wash sale rule applies only to the shares I bought back.

Some of the 500 shares had been held for > 1 year, and some for < 1 year. When I do my tax return, I create 2 entries to take that into account. For example:

Short term loss: 200 shares
Long term loss: 300 shares

My question is this: when computing the partial tax loss, should the 400 shares I purchased in my IRA first offset the shares held short term and then the shares held long term or vice versa?

In other words, should I report:

1) 200 short term shares washed out by 200 new shares + 200 long term shares washed out by 200 new shares => I get to deduct the long term loss on the sale of 100 shares.

or

2) 300 long term shares washed out by 300 new shares + 100 short term shares washed out by 100 new shares => I get to deduct the short term loss on the sale of 100 shares.

or

3) something different.
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Old 10-08-2009, 02:47 PM   #2
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Google "wash sale IRS" and you find Pub 550. Click on wash sales in table of contents and find this:
More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

There are some nice examples there that might be useful.
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Old 10-08-2009, 04:35 PM   #3
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Quote:
Originally Posted by kaneohe View Post
Google "wash sale IRS" and you find Pub 550. Click on wash sales in table of contents and find this:
More or less stock bought than sold. If the number of shares of substantially identical stock or securities you buy within 30 days before or after the sale is either more or less than the number of shares you sold, you must determine the particular shares to which the wash sale rules apply. You do this by matching the shares bought with an equal number of the shares sold. Match the shares bought in the same order that you bought them, beginning with the first shares bought. The shares or securities so matched are subject to the wash sale rules.

There are some nice examples there that might be useful.
Thanks a lot. So it seems like the answer is (2). The wash is on the oldest shares and the loss is on the newest shares.
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