Wash Sale Reporting Question

[joesxm3]

I thought that brokerage companies would take care of tracking wash sales and increase the basis of remaining shares appropriately if a wash sale occurred.

Last month I asked my brokerage about this and they said that they do this within a given account, but if I sold for a loss in my taxable account and then bought in my IRA causing a wash sale, they would not reflect the wash sale in my taxable account. However, they pointed out that the IRS would still consider it a wash sale.

So, on 9/26 and 10/4 I sold some SQ shares at a loss in my taxable account, but was careful to leave five shares to receive the increased basis should I decide to buy some back in a dip.

Having forgotten about the sales in the taxable account, on 10/19 I bought some SQ in my IRA. The purchasing of the SQ in the IRA triggered the wash sale for the shares I had sold in the taxable account earlier in the month.

I had been planning to take the easy route and simply report the net amounts on the tax form since the brokerage would have sent them to the IRS.

But now it seems that I will have to report that account item by item and check off the wash sale box for the shares of SQ.

The loss I could not claim due to wash sale should now be added to the basis of the remaining five shares. I will have to track this manually since the brokerage does not consider it a wash sale.

The simplest course of action seems for me to wait 30 days until the 10/19 purchase and sale is out of scope for wash sales and then sell the remaining five shares.

So my return would look something like (numbers are made up):

10/4 sold 20 shares SQ; proceeds $1200; basis $2000; loss ($800) wash sale

12/4 sold 5 shares SQ; proceeds $300; basis $1300 (i.e. $500 + $800); loss ($1000)

It seems to me that my logic is correct, but I worry that since this will not match what the brokerage will be reporting it might draw some attention and I might have some explaining to do.

Any thoughts?

 

[joesxm3]

I was looking at an article that described the disallowed loss from a wash sale being added to the basis of the "replacement shares".

This article was in the context of the sale and purchase occurring in the same account.

But that made me wonder if there is some sort of "gotchya" where the disallowed loss from the sale in my taxable account would have to be added to the basis of the shares in the IRA whose purchase triggered the wash sale rather than to the remaining five shares in my taxable account.

[edit]

I found this Forbes article dealing with the topic (subject to 4 free article limit). The article says that the IRS requirements for brokerage reporting only require the same CUSIP in a single account to be tracked. But the rules for individuals require CUSIP across accounts as well as substantially similar positions, including options.

https://www.forbes.com/sites/greats...be-a-big-tax-return-headache/?sh=5bcb30dd1022

It seems this subject is enough of a pain in the butt to make one try to hold a given stock only in a single account.

 

[SecondCor521]

Some answers:

There was no need to leave 5 shares of SQ to receive the adjusted basis. If you had sold all at a loss then rebought within 30 days, the new shares you bought would have received the adjusted basis.

Yes, the IRA purchase triggered the wash sale. I believe that to the extent that you bought SQ, each share in your IRA becomes a replacement share for the shares you sold in your taxable account on 9/26 and 10/4.

You should report the numbers for the sales on your Schedule D and Form 8949 that you receive from your broker so that all numbers match.

There is no wash sale box. There is a wash sale adjustment code ("W") and an adjustment amount on Form 8949 in columns (f) and (g). For example, let's assume that you bought 20 shares of SQ in your IRA, your first two entries would be similar to:

10 shares SQ various 9/26/2022 $600 $1000 W $400 $0
10 shares SQ various 10/4/2022 $600 $1000 W $400 $0

(The above lines up with the columns on Form 8949 and uses the same prices as your original post, just splitting it into two transactions.) (*)

This reflects the fact that you sold on two separate occasions, had a loss of -$400, but a wash sale adjustment disallowing that loss of +$400, for a net loss of $0.

There is no reason to track the basis adjustment to the shares in your IRA. IRAs do have basis, but not in the same way taxable accounts do, and your wash sale basis adjustment of $800 is lost forever as far as I know.

Thus your third line, assuming you haven't done and don't do any more purchases or sales, would be:

5 shares SQ various 12/4/2022 $300 $500 -- -- ($200)

Reflecting the fact that because you hadn't purchased any SQ on 30 days prior or 30 days after the sale, there is no wash sale on the 5 shares SQ sold a little over a month from now.

If you bought fewer shares in your IRA than the number of shares you sold in your taxable, then I believe you could reduce the wash sale adjustments appropriately. So if you only bought 10 shares of SQ in your IRA, then you would only have half of the wash sale adjustment to make. I *think* it would all be on the first shares, like thus:

10 shares SQ various 9/26/2022 $600 $1000 W $400 $0
10 shares SQ various 10/4/2022 $600 $1000 -- -- ($400)

But you should read the IRS rules on replacement shares and confirm which of the sold shares get replaced by the shares in your IRA.

Finally, yes, reporting different information on your Form 8949 and/or Schedule D from what is reported by your brokerage is generally a bad idea and will probably draw the attention of the IRS computers for a data mismatch. Columns (a) through (e) should match your broker's 1099-B; any adjustments you make should be, as previously mentioned, in columns (f) and (g).

(*) Technically you might be able to get away with reporting one sale on 10/4 - I've seen it done that way. But since you have wash sales involved I personally wouldn't do it that way.

 

[SecondCor521]

I was looking at an article that described the disallowed loss from a wash sale being added to the basis of the "replacement shares".

Yup.

But that made me wonder if there is some sort of "gotchya" where the disallowed loss from the sale in my taxable account would have to be added to the basis of the shares in the IRA whose purchase triggered the wash sale rather than to the remaining five shares in my taxable account.

Yes, they would.

I found this Forbes article dealing with the topic (subject to 4 free article limit). The article says that the IRS requirements for brokerage reporting only require the same CUSIP in a single account to be tracked. But the rules for individuals require CUSIP across accounts as well as substantially similar positions, including options.

Yup.

It seems this subject is enough of a pain in the butt to make one try to hold a given stock only in a single account.

Yup. Or be careful to avoid the wash sale to avoid the hassle.

 

[SecondCor521]

You might find this on point:

"A wash sale occurs when you sell or otherwise dispose of stock or securities (including a contract or option to acquire or sell stock or securities) at a loss and, within 30 days before or after the sale or disposition, you:

1. Buy substantially identical stock or securities,
2. Acquire substantially identical stock or securities in a fully taxable trade,
3. Enter into a contract or option to acquire substantially identical stock or securities, or
4. Acquire substantially identical stock or securities for your individual retirement arrangement (IRA) or Roth IRA.

You can't deduct losses from wash sales unless the loss was incurred in the ordinary course of your business as a dealer in stock or securities. The basis of the substantially identical property (or contract or option to acquire such property) is its cost increased by the disallowed loss (except in the case of (4) earlier)."

-- https://www.irs.gov/instructions/i1040sd#en_US_2021_publink1000285546

The stuff about IRAs and case (4) is what I was alluding to in my first reply. Your capital loss, to the extent that you created a wash sale by your IRA purchase, is just gone forever. (Sorry to be the bearer of bad news.)

 

[joesxm3]

SecondCor521,

Thank you for taking the time to write such a detailed reply.

I guess the $1600 or so loss, or the $350 tax savings is just the tuition I had to pay to learn this lesson the hard way. I doubt I will make that mistake again.

Another way of looking at it, is $350 is a small price to pay to avoid making a mistake and bringing down the wrath of the IRS on my head.

Thanks again. I really appreciate the help and hope others read this thread and avoid making the same mistake I did.

 

[cathy63]

SecondCor521,

Thank you for taking the time to write such a detailed reply.

I guess the $1600 or so loss, or the $350 tax savings is just the tuition I had to pay to learn this lesson the hard way. I doubt I will make that mistake again.

Another way of looking at it, is $350 is a small price to pay to avoid making a mistake and bringing down the wrath of the IRS on my head.

Thanks again. I really appreciate the help and hope others read this thread and avoid making the same mistake I did.

Just to play devil's advocate ... the wrath of the IRS is extremely unlikely to fall upon your head. The IRS does not get details of the transactions that were made in your IRA, so they have absolutely no way to know that you owe that $350 unless they audit you. Even if they were to audit you I doubt if they would look at your IRA transactions just to check and see if there's a wash sale in there. And if they did do some incredibly detailed investigation and discover this transaction, it's the sort of mistake that most taxpayers make accidentally (as you did) and without knowing it's a problem, so they would probably be willing to waive any penalty and just make you pay the tax and recalculate the cost basis going forward.

 

[youbet]

Just to play devil's advocate ... the wrath of the IRS is extremely unlikely to fall upon your head. The IRS does not get details of the transactions that were made in your IRA, so they have absolutely no way to know that you owe that $350 unless they audit you. Even if they were to audit you I doubt if they would look at your IRA transactions just to check and see if there's a wash sale in there. And if they did do some incredibly detailed investigation and discover this transaction, it's the sort of mistake that most taxpayers make accidentally (as you did) and without knowing it's a problem, so they would probably be willing to waive any penalty and just make you pay the tax and recalculate the cost basis going forward.

Wouldn't OP's broker mark the sale (in the brokerage account) as a "wash sale" even though the purchase in the IRA would not be reported? The IRS wouldn't know (or care) that the wash-sale-causing purchase was in an IRA. They'd just know that the sale in the brokerage account was flagged "wash sale" by the broker.

 

[cathy63]

Wouldn't OP's broker mark the sale (in the brokerage account) as a "wash sale" even though the purchase in the IRA would not be reported? The IRS wouldn't know (or care) that the wash-sale-causing purchase was in an IRA. They'd just know that the sale in the brokerage account was flagged "wash sale" by the broker.

No, the brokerage only has to keep track of transactions within a single account, not under all accounts with the same owner. If a transaction in a second account causes a violation of the wash sale rule, the brokerage does not have to report it to the IRS, even if both accounts are taxable.

 

[joesxm3]

Just to play devil's advocate ... the wrath of the IRS is extremely unlikely to fall upon your head. The IRS does not get details of the transactions that were made in your IRA, so they have absolutely no way to know that you owe that $350 unless they audit you. Even if they were to audit you I doubt if they would look at your IRA transactions just to check and see if there's a wash sale in there. And if they did do some incredibly detailed investigation and discover this transaction, it's the sort of mistake that most taxpayers make accidentally (as you did) and without knowing it's a problem, so they would probably be willing to waive any penalty and just make you pay the tax and recalculate the cost basis going forward.

True, but I am one of the stupid ones who goes so far as to fill out the state form to pay sales tax on all my out of state purchases and Internet purchases even though all my friends laugh at me.

Plus, when I am wearing my tin foil hat I would probably imagine that the big AI in the sky has been following this thread and cross referencing to my future tax return.

On a side note, a couple weeks ago I got fed up with my Xfinity Internet dropping several times per day and called up Frontier to ask about getting Frontier Fiber. I also sent a text to a friend asking his opinion. All of this was done on a mobile phone from Xfinity.

Within 10 minutes of making the call, I got a text message (not sure if it was real or a scammer) saying that my Xfinity account was now eligible for a 50% discount and to call to claim it.

I also have gotten ads for things I mentioned in Gmail emails. And I am using the Chrome browser right now

 

[joesxm3]

It just occurred to me that maybe I could "recover" my lost basis by buying some more shares of SQ in the taxable account?

If I were to buy the same number of shares that I sold on 9/26 and 10/4, the brokerage would consider them, in the same account, as the ones that triggered the wash sale event and then flag the originals as wash sales and increase the basis of the shares I just bought.

 

[youbet]

No, the brokerage only has to keep track of transactions within a single account, not under all accounts with the same owner. If a transaction in a second account causes a violation of the wash sale rule, the brokerage does not have to report it to the IRS, even if both accounts are taxable.

Thank you for that clarification cathy63. I really appreciate the way you share your expertise here!

 

[SecondCor521]

It just occurred to me that maybe I could "recover" my lost basis by buying some more shares of SQ in the taxable account?

If I were to buy the same number of shares that I sold on 9/26 and 10/4, the brokerage would consider them, in the same account, as the ones that triggered the wash sale event and then flag the originals as wash sales and increase the basis of the shares I just bought.

Maybe.

Technically, I think the super proper course of action would be to consider the IRA shares as the replacement shares, since you bought them first.

But again, read up on how replacement shares work in the IRS documentation. In anything but the simplest scenarios, it can get tricky quickly.

 

[joesxm3]

Maybe.

Technically, I think the super proper course of action would be to consider the IRA shares as the replacement shares, since you bought them first.

But again, read up on how replacement shares work in the IRS documentation. In anything but the simplest scenarios, it can get tricky quickly.

Well you are right on the money here. I found this from Fairmark saying that in the case of excess replacement shares, the oldest ones count first.

https://fairmark.com/investment-taxation/capital-gain/wash/wash-sale-matching-rules/

Luckily I have only six or seven CUSIPs traded in the account in question, so entering them individually will not be a huge pain.

Thanks again. I almost bought the shares pre-market but the spread was too large so I was going to wait until open. I read your post and you saved me from making a mistake.

 

[joesxm3]

One other point I would like to make sure I understand.

If I sell 100 shares on 10/1 and buy back 50 shares on 10/20, are there 100 shares with a wash sale or only 50?

I used to think it was all or nothing with one share making any number of shares a wash, but the concept of "replacement shares" makes me think that the quantity matters.

Thanks.

 

[SecondCor521]

One other point I would like to make sure I understand.

If I sell 100 shares on 10/1 and buy back 50 shares on 10/20, are there 100 shares with a wash sale or only 50?

I used to think it was all or nothing with one share making any number of shares a wash, but the concept of "replacement shares" makes me think that the quantity matters.

Thanks.

For the sake of this answer I'm assuming that you're referring to a different stock than SQ. Let's say it's 100 shares of IBM sold on 10/1 and 50 shares bought back on 10/20. And the 100 shares would have to be sold at a loss, of course.

Only 50. Quantity matters. That is why I wrote in an earlier reply:

"If you bought fewer shares in your IRA than the number of shares you sold in your taxable, then I believe you could reduce the wash sale adjustments appropriately. So if you only bought 10 shares of SQ in your IRA, then you would only have half of the wash sale adjustment to make."

 

[joesxm3]

Thanks again.
I did see the comment in the prior post, but I just wanted to be double sure before I filed the info into permanent storage.