Have a Tax Question? Ask a Tax Expert
Thank you for contacting me about your Tax issue. I will work hard to help you understand the issue clearly.
The statement you ask about is correct. On a wash sale, the basis gets adjusted. Let's take a look at a simple example:
You buy a stock for $10. You sell it for $8, but the next day, you buy it back for $9 hoping it will go back up. You sell the second purchase 60 days later for $9.50.
On the first sale, you see a $2 loss, but because you bought the replacement within the 30 day window, you cannot take the loss. So, for tax purposes you have a $0 gain or loss.
If you did not adjust the basis of the second purchase, when you sell the second stock, you would have a 50 cent GAIN, not a loss. And for the year, you would have a 0 loss plus 50 cent gain for a 50 cent gain total. But you lost money along the way.
By increasing the second purchase by the disallowed amount, in this case $2, your second purchase effectively costs $9 + 2 = 11. When you sell for $9.50, you have a loss of $1.50
This is correct total for the whole year. You lost $2 on the first trade and made .50 on the second, for a net loss of $1.50
But for taxes, it appears as though you lost 0 on the first trade and lost 1.50 on the second, which ALSO TOTALS 1.50 for the whole year.
Hope this helps