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Lev
Lev, Tax Advisor
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How does one recover the amount of a disallowed loss? As

Resolved Question:

How does one recover the amount of a disallowed loss?

As I understand it, if shares are repurchased, we can add the amount of the disallowed loss to the cost basis of the new shares.

But what if no new shares are purchased? Can it really be that the IRS is telling investors if they buy something outright and sell within 31 days (ignoring the 61-day window here, given that I am not talking about repurchasing shares) their loss is disallowed? How is this a wash sale? It's a buy and a sell, period!

What does this do to dollar cost averaging if someone has DCA'd a mutual fund for 10 years and then sells at a loss? Do those 1.3 shares reinvested 30 days ago invalidate the entire 10 year holding period? What am I missing?

Most importantly: if there is a disallowed loss and no new purchase, is that disallowed loss simply "lost" to the investor forever? As part of the same line of thinking, if the investor purchases additional shares AFTER the 61-day window, can they then adjust their basis up by the amount of the previous disallowed loss? Or can the disallowed loss be used to increase the basis for a profitable transaction in the same security? (Thus reducing the tax bite.)
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

LEV :

Hi and welcome to Just Answer!

LEV :

If you are talking about wash sale - there shoudl be two transactions.
if no new shares are purchased - there is no wash transaction - so there should be a purchase order which triggers the wash...

LEV :

If we are not repurchasing shares - there is no wash - and losses of teh sale are deductible against other capital gains.

LEV :

if someone has DCA'd a mutual fund for 10 years and then sells at a loss - that loss may be used to offset the capital gains.
However - if 1.3 shares reinvested 30 days are sold with all other shares - there is no wash sale. If however - you keep that 1.3 shares - that is a wash sale and losses are added to basis.

LEV :

If however there is no new purchase - as you stated - that is not a wash - and nothing disallowed.

LEV :

The only situation when disallowed wash loss simply "lost" to the investor - if new shares are purchased within tax deferred account - such as IRA.

Customer:

Thank you for the clarity of your response. You’ve confirmed much of what I thought. I am neither lawyer nor CPA, but am retired from the securities industry and currently a Registered Investment Adviser. The example that caused my question – and threw me – is that I purchased 2800 shares of a $70 stock for one client over a few months then, mistakenly thinking FIFO applied, sold 2500 for $60. I kept the 300 most recently purchased, 28 days prior to the sell of 2500. It didn’t seem logical to me that I would take that $25,000 disallowed loss and apply it to a mere 300 shares when I sell them (let’s say in 2012.) That adds $8333 to the cost basis of each 100 shares, for a “new” basis when I sell them of $153.33 per share! I realize there is nothing logical about the IRS but if I declare a basis of $153.33 per share for a stock that has never in its history been over $100, I thought it would lead to a red flag at best, XXXXX XXXXX for my client at worst. But it seems that you are telling me that is exactly what the IRS wants me to do! If so, and you clarify this point with a hearty “Yep!” that’s what I’ll do, and thank you profusely for saving me many hours of further anguish over this.


Respectfully,


JS


 

LEV :

Let put in order...
day 1 - purchased 2500 shares of a $70 stock
day 2 - few months later - purchased 300 shares of a $70 stock
day 3 - 28 days later - sold 2500 for $60 - loss $25,000 - that is wash where the problem started - your mistake - we need to admit that. You are correct - the loss is added to the basis of 300 shares your purchased. You will recognize the loss only when you sell these shares (assuming that will not be wash sale again).
That is an adjusted basis - nothing to do with the purchase price or red flags.
Yes - I am telling what the IRS rules - I may not make my own rules.
Please be aware that wash sales are also reported on the tax return - so the IRS tracking them to some extends...
Do not waist you time for arguing.


You might need to use a software to validate proposed sales for wash rules.

Customer:

Wow. I'm not certain why you said, "Do not waist you time for arguing" or "You might need to use a software to validate proposed sales for wash rules." All I said was "thank you" and gave a professional example so you would see why I was initially confused. I was quite prepared to rate this chat 100% helpful. I assure you, I am not interested in arguing with you, only re-stating what you said for my understanding. As for tax software, you may not have noticed that before I asked the question, I noted the TurboTax Community of Experts were completely confused, as were two CPAs.

Customer:

Thank you for your speedy response to my questions. I am satisfied with the answers and wish you well.

LEV :

I were using your example - just added some analysis...
Please be sure to bookmark this page - you might need to come back.

LEV :

I am trading on my own - and know wash sale rules well enough to follow.

Customer:

Good day.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 23193
Experience: Taxes, Immigration, Labor Relations
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